Elevated market volatility is additionally leading to capital-structure mispricings between equity and debt, so we upgrade Credit Long/Short to positive, with a focus on bottom-up manager selection. There has also been an increase in fundamentally driven issuer- and sector-level dispersion, given pressure on profit margins and higher interest expenses, and higher yields. We believe the opportunity set for credit is improving: credit spreads are wider, lower-rated issuers have underperformed, and capital access for lower-rated names has become more limited. We upgrade Credit Long/Short to positive, with a focus on bottom-up manager selection. We are becoming more constructive on opportunities across Credit. Our Outlookįigure 1 shows our stance on different hedge-fund strategies for Q2 2023. Tighter lending standards have yet to translate into more defaults and we are staying away from directional credit risk as such, we retain a negative view on Distressed for now. The picture has improved for Credit Long/Short, in our view, as dispersion in credit has increased which allows for trades across the capital structure of companies. We believe that this more volatile macro environment will continue to provide opportunities for Global Macro traders, but be more challenging for Macro Quantitative funds, whose models may struggle to adapt with rapidly changing conditions. We expect the narrative to continue to rotate between inflation, growth and financial stability – leading to a continuation of this more volatile macro environment and reinforcing the case for the aforementioned priorities. Treasuries became a safe haven again, having hitherto been regarded cautiously for their sensitivity to inflation. Interest rates collapsed and the negative bond/equity correlation reasserted itself. This premise was tested in the first quarter as the collapse of several US regional banks and the forced takeover of Credit Suisse led to a shift in the market’s sentiment towards bonds. Our last outlook outlined our priorities for this year as diversification, liquidity and risk management. We expect the narrative to continue to rotate between inflation, growth and financial stability – leading to a continuation of this more volatile macro environment.
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