The Growth of Relative Value Credit Strategies

Although markets are less volatile than they were in the teeth of the COVID-19 gale that blew in March and April 2020, there are still plenty of factors which could introduce new volatility.

The use of relative value credit analytics is not new, but the importance of this methodology has come into sharper focus and has been the subject of increased investor attention over the last 12 months.

There are two main reasons why relative value credit strategy has become a hot topic in the last year. The first is an extraordinary surge of issuance seen in bond market. The second is the extreme volatility within the credit sector in the face of COVID-19. Both these phenomena have created significant opportunities for realisation of value, and although, by the time of writing, the markets have calmed down considerably from the turbulence seen 12 months earlier, the party is not over yet.

To be able to spot the opportunities, investors need both adroit analysis and powerful digital technology at their disposal. They have to able to survey the entire credit landscape to isolate the potentially profitable dislocations and then execute trades quickly before they vanish. Risk managers also need state of the art tools to measure and report on portfolio risk at all times.

Opportunities exposed by the use of relative value strategies present themselves often only fleetingly, so investors need to act swiftly and nimbly to exploit these openings. Moreover, to expose all possible dislocations, credit investors need to maximise the field of vision, so they should be able to trade as wide a range of asset classes as possible, including cash and synthetic products.

This includes, for example, corporate, government, municipal, emerging, convertible, hybrid and mortgage-backed bonds, indices, ETFs, loans and CLOs in the cash space, and single name credit default swaps, collateralised debt obligations, CDX indices, CDX tranches and credit options in the synthetic space.

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