WHY SHOULD I CONSIDER CREDIT INVESTING?
A credit investor provides a loan to a borrower and earns interest. Credit is private – loans made to individuals or smaller companies – and public – loans made to large companies that are structured as bonds and traded in public markets. We provide access to both kinds of credit investing.
All credit investments are impacted by default risk: the chance that the borrower will not pay back the loan.
Public credit investments are also impacted by interest rate risk. If interest rates go up, the value of a bond with a lower interest rate will decline. Interest rate risk has much more impact on bond investing than default risk.
It is difficult for investors to access credit investing directly for a variety of reasons, including the complexity of investment strategies, the size of investment necessary, and limited access to bond markets.
You may not have thought of credit as a unique asset class because there is no such thing as a credit traditional fund. Alternative investing isolates credit and, unlike traditional bond investing, it eliminates some or all interest rate risk. That gives you access to benefits that traditional bond investing has difficulty delivering:
Capital preservation. Eliminating specific risks, such as interest rates or inflation, provides protection of your investment.
Absolute returns. The potential to earn positive returns in all market environments.
Diversification. Credit can help to smooth out the ups and downs of traditional investments in your portfolio.
New Solutions are Vital
Traditional bond investing is at a cross-roads. Yields are incredibly low and if interest rates continue to increase, investors will lose money. Long/short credit strategies help investors to avoid both of these pitfalls.
Credit is Unique
Asset classes often do not move together because returns are driven by different predominant factors. This fact makes credit a good way to diversify the traditional investments in your portfolio.
Company growth and profit Equity
Interest rates Bonds
Company default risk Credit
Many credit fund flavours
Credit funds have varying levels of risk. Some credit funds actively manage interest rate risk instead of eliminating it, making these funds less of a pure credit play. Funds that invest in high yield or unrated issuers may have a risk profile that is closer to equities. Funds that eliminate interest rate risk and focus on investment grade issuers are more likely to deliver the full benefits of credit.