If the hedge fund bets are correct, the corporate bond market could finally turn around. More capital is moving back into fixed income as certain debt issues are flushing value-oriented opportunities in a difficult market environment.
According to a Financial Times article, “Large hedge funds take bargains on junk and other corners of the corporate bond market as they bet on overdose of selling triggered by a bleak global economic outlook. Central banks around the world could put the brakes on tightening monetary policy, which is weighing down bond income as interest rates rise.
Hedge funds are seeing opportunities in riskier bonds that investors have shunned in a dark market full of unknowns. Recession risks are pushing investors further away from corporate bonds, but some hedge funds see value in riskier debt and believe higher rewards lie ahead.
Daniel Loeb of Third Point LLC said: Third Point is essentially betting on a recovery in the corporate bond market, but it doesn’t believe it will recover anytime soon, so investors will need patience in the long run if they want to emulate the same strategy.
Given the thin bond market, investors don’t need to fly blind when looking for corporate bond opportunities. An active management style can essentially put a fixed income investor’s portfolio into autopilot mode.
Navigating a thin bond market
Arguably, bonds in general have seen better times. That said, as noted earlier, weakness across the fixed income market could give way to the value proposition, particularly in the area of corporate bonds.
Corporate bonds can still provide investors with a good amount of yield and are valuable to fixed income investors as bond prices are low in the current market environment. The question here is where do investors start in obtaining corporate bond exposure?
of American Century Diversified Corporate Bond ETF (KORP) We answer this question by giving investors exposure to active management strategies. This puts bond holdings in the hands of investment professionals, rather than individual investors and advisors handpicking their bond holdings.
KORP provides yield while adding diversification to primarily investment grade quality holdings. The fund’s description seeks current income by highlighting investment-grade debt while dynamically allocating a portion of its portfolio to high yield.
According to its product website, KORP creates a systematically managed portfolio that integrates fundamental and quantitative expertise such as:
- Adjust investment grade and high yield bond components to balance interest rates and credit risk.
- We screen individual credits for those with sound fundamentals, reduced default risk, attractive valuations and liquidity.
- Adjust industry and duration exposures as risks and opportunities emerge.
- It has a relatively low expense ratio of 0.29% and is highly cost-effective.
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