RBC BlueBay Asset Management has released a report entitled “Shifting Strategies: How institutions are embracing fixed income hedge funds” surveying institutional investors’ perceptions and intentions regarding alternative investment strategies including private credit, total return, and multi-strategy credit.

Global institutional investors are feeling bullish about the return potential from fixed income hedge funds. This optimism is driven by strong financial performance, evolving fee structures, and greater levels of market liquidity according to research commissioned by RBC BlueBay Asset Management. The report revealed that 63 per cent of global institutional investors expect annual returns of 10 per cent or higher from fixed income hedge funds.

However, in contrast to investors’ future expectations, 47 per cent of fixed income hedge fund investors surveyed reported having earned double-digit returns. Fifty-two per cent of investors said their annual fixed income hedge fund performance ranged between 5 and 9 per cent.

Fixed income hedge funds have become mainstream among global institutional investors as they seek higher yields without liquidity, the firm said in a statement. Of those who responded to the survey, 60 per cent are currently invested in hedge funds and, of these, 84 per cent are allocated specifically to fixed-income strategies.  

Comprising responses from 450 senior investment decision-makers from asset owners across the US, Europe, and Asia managing assets of between $5 billion and more than $100 billion, the report found several factors underpinning the demand for fixed income hedge fund strategies. These include historically strong financial performance (65 per cent) – rising to 84 per cent in Asia and 70 per cent in the US – evolving fee structures (48 per cent) and greater levels of market liquidity (45 per cent). The report was carried out just after the November 2024 US presidential election.

In the case of hedge funds, 55 per cent reported that their opinion of these strategies has become more positive. When asked about plans for their hedge fund allocation in the year ahead, more than a third (36 per cent) stated that they plan to fund this through new inflows while a quarter plan to decrease their allocations to other alternative strategies.

Figures from Hedge Fund Research, a Chicago-based firm tracking the sector, also show that total global hedge fund capital stood at an estimated $4.51 trillion, rising $401.4 billion for the full year. 

“We believe we are in the golden age for fixed income hedge funds. Geopolitical tensions and interest rate policies continue to be top of mind for investors, and the resulting uncertainty is likely to create volatility in the markets,” Polina Kurdyavko, a hedge fund manager and head of BlueBay emerging market debt at RBC Global Asset Management, said.

The fortunes of hedge funds have waxed and waned over recent decades, but for all the criticisms that are sometimes made about them – from famed investor Warren Buffett for example – their ability to deliver returns in different, and difficult, market environments means that they remain part of the wealth management toolkit.

Factors
The report highlighted the three main factors that investors think will impact fixed income in the next three to five years: geopolitical tensions (60 per cent); interest rate policies (58 per cent); and highly volatile equity markets (48 per cent).

Asset class (69 per cent) and predictability/volatility of returns (59 per cent) are also the two priority factors for investors when assessing potential allocations investments into fixed income hedge funds, the report reveals.

Forty-two per cent of investors plan to consider higher yielding assets in response to macroeconomic expectations for the year ahead, with 48 per cent expecting target returns of between 10 and 19 per cent from their managers.

Sixty-one per cent of institutional investors also plan to evolve their exposure to hedge funds and 59 per cent to private credit (e.g. specialist situations, securitised credit, distressed debt) over the next 12 months, the research shows.

RBC BlueBay Asset Management, which represents RBC Global Asset Management outside of North America, is an active asset manager with expertise across fixed income, equities and alternatives. RBC Global Asset Management manages about $503 billion in assets and has about 1,500 employees.