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The role of alternative fixed income strategies in today’s market environment
In 2025 so far, the investment landscape has presented unique challenges and opportunities. Mark Dowding, BlueBay CIO, shares his views on which areas may offer promising returns for investors in a climate of high interest rates and market inefficiencies.
Key takeaways include:
- We’re seeing a shift in investor interest towards hedge funds and other fixed income alternatives that can capitalise on market inefficiencies.
- It’s important to invest with skill in order to take advantage of term premia, liquidity premia, and volatility premia in the fixed income market.
- The current economic cycle and interest rate climate means there are a range of opportunities from multi-strategy offerings to illiquid credit strategies to distressed debt in Europe.
The role of alternative fixed income strategies in today’s market environment
by Mark Dowding, BlueBay CIO.
Coming into 2025 and looking at the investment landscape, I think that this is one of those moments where we look around us. I think we'd say that there aren't a lot of asset classes that stand out as especially cheap. From that point of view, I think a lot of investors are scratching their heads, where do they allocate capital? From that point of view, we'd actually make a very strong case at this particular time that investors should be looking more toward fixed income alternatives.
Now, within fixed income alternatives, I think a lot of interest over the course of the last couple of years has gone very much towards private markets and private debt, and ostensibly direct lending funds. Though this is a part of the market, part of the alternative landscape that we actually think this is not the part of the cycle to be allocating more capital in that direction. Effectively, we're at a point where many of those underlying entities are running at very high levels of balance sheet leverage.
In a world where interest rates are staying high for longer, you can end up with performance being impacted by the fact that free cash flow is being eaten up by those elevated funding costs. We wouldn't really be highlighting direct lending as the space to be looking in in fixed income alternatives. Indeed, I think the smart money that we've been engaging with over the course of the last few years if anything, is more in retreat from that part of the market at this particular point in time.
What I think we are seeing is more of a resurgence, more renewed interest in other fixed income alternatives, notably for example in the hedge fund space. Because here, I think that we do see the ability to deliver returns effectively by investing skill in inefficient markets. In fixed income, we have term premia, we have liquidity premia, we have volatility premia, and we have a constant issuance of new securities that keeps markets relatively inefficient, particularly because a lot of people who own fixed income aren't always return-maximizing.
That being the case, we feel that if you can execute with skill, then you should be able to deliver attractive returns, returns that stand up very attractively compared to many other equity strategies for example. In this context, we see demand, we see interest in multi-strategy offerings, such as the one that's on our own platform. We also see client interest in our emerging market credit alpha strategy and investment grade credit alpha strategy in macro fixed income. Also, in structured credit as well and in distressed debt. There are these many corners of the fixed income market where we believe you can get very attractive risk-adjusted returns, and here, you can deliver returns by investing both short as well as long.
Learn more about how investors are approaching fixed income alternatives in our latest report
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