Credit markets are experiencing unprecedented volatility as hedge fund managers focus on liquid high-quality credits at or near the top of the capital structure and avoid riskier bonds and loans.

Credit markets are experiencing unprecedented volatility with the impact of the eurozone crisis and regulation adding further uncertainty. The panel discussion looks at what makes the current market so different to the environment of only a few years ago, as well as the specific indicators managers are closely watching to help them exploit opportunities.

Also discussed were the differences between managers following this strategy in the US, Europe and emerging markets.

Hedge funds are cautiously optimistic about the US high-yield bond markets. While spreads are attractive, the uncertainty in Europe, fickle investor flows and reluctance among dealers to provide liquidity could be a source of downside risk in the near term, according to credit specialists.

Fund managers are focusing on liquid high-quality credits at or near the top of the capital structure and steering clear of riskier bonds and loans. The primary concern in the near term continues to be Europe. A mismanaged sovereign debt default in Greece or Italy could cripple European banks and make it harder for high-yield companies to access the capital markets.

There is also the lingering fear of a second US recession, which could cause default rates among high-yield companies to climb.

The panel discussion covered differences in today's market environment for the strategy compared with pre and post-2008 as well as looking at the indicators and mechanisms managers use to forecast market moves and find opportunities. Discussion centred around how risk and volatility are affecting portfolios and investment choices and the effect more deleveraging and more liquidity going out of the market will have on the strategy.

The panel talked about the specific sectors or regions that are most attractive, the impact of regulation scenarios based on a default in one of the eurozone countries and what opportunities credit offers investors in 2012.

Panel participants
Aurelie Vincent, head of CTA, global macro and fixed income strategies, hedge fund research and selection department, Lyxor Asset Management (managed account platform)
Paul McNamara, GAM
Chris Bullock, Henderson
Odell Lambroza, Advent Capital Management
Panel moderator: Margie Lindsay, editor of Hedge Funds Review

Watch the panel discussion