The case for credit in 2023

• European credit offers substantial alpha opportunities, says Gallo
• CQS and Altana Wealth say yields very attractive after repricing
• Related: Bonds are back, says Altana Wealth

Credit hedge funds largely protected investor capital during the market sell-offs last year, with low single-digit losses typical — but managers in the space are more bullish on the 2023 opportunity set.

The former Algebris Investments manager Alberto Gallo, who has launched his own firm, Andromeda Capital Management, in London, sees most opportunities in Europe.

“Credit offers unusually high upside, with selective protection from public balance sheets,” he said in an investor letter. “We see substantial upside in Eurozone credit, and significant opportunities for alpha across vulnerable cyclical sectors in the US and UK.”

Allocators have taken note. According to a Preqin survey at the end of last year, 41% of hedge fund investors want to increase their exposure to credit strategies, only beaten by macro.

“The credit repricing in 2022 has led to attractive yields,” reported London-based CQS in a research note. “European and US high-yield indices yield more than 8% (on a currency unhedged basis), substantially higher than the 3.75% seen barely one and a half years ago.

“Investors willing to clip bond coupons may have attractive options in 2023.”

Michael Hintze’s CQS, which invests most of its $20bn under management in long-only strategies, is not alone in seeing attractive opportunities on the long side after last year’s tumult in the markets.

Corporate bond opportunities are increasing as the market “defrosts” after a bruising period for fixed-income, said Lee Robinson, the Altana Wealth founder, in November.

“Bond yields are attractive,” Robinson, who manages the Altana Corporate Bond Fund Ucits with Philip Crate, told investors in an update. “Bonds can generate a great income whilst you wait for other assets to become attractively priced.”