Citi Global Wealth PUTTiNG YoUr CASH To worK iN A HiGHer rATe eNviroNMeNT | | 49 Investments FiGUre 4: DiSTreSSeD HeDGe FUND PerForMANCe wHAT To Do Now? AFTer DiFFiCULT PerioDS For HiGH-YieLD BoNDS Given today’s heightened level of uncertainty, we do not see a case DRAWDOWN ANALYSIS HFRI ED: DISTRESSED/RESTRUCTURING for being overweight high-yield credits in general. Instead, we favor HFri selective exposure via skilled bond picking managers, who seek to BeGiN eND HY iNDeX ForwArD exploit the wide dispersion in the best and worst performing bonds. DrAwDowN 24M reTUrN We believe those specializing in credit underwriting, those able to Global work with companies on capital solutions and those with distressed financial crisis 31 May ‘07 30 Nov ‘08 -33.2% 34.8% restructuring expertise may be best placed to achieve this. early CoviD 31 Jan ‘20 31 Mar ‘20 -13.1% 48.2% In the public markets, we prefer managers who can evaluate absolute pandemic and relative value, and who focus on events that will seek idiosyncratic Dot-com 30 Apr ‘00 31 Jul ‘02 -12.0% 46.3% returns and upside capture along with downside protection. bust early 90s In private markets, we believe that managers with flexible capital may recession 31 Jul ‘90 31 oct ‘90 -11.2% 66.0% be rewarded, allowing them to evaluate financing solutions across energy sector’s the continuum while patiently awaiting the emergence of potential wave of defaults 31 May ‘15 31 Jan ‘16 -9.8% 27.8% distressed opportunities. AverAGe -15.9% 44.6% Managers without the requisite scale may be at a competitive disadvantage in this market. We have seen this occur in 2022 in Source: Bloomberg, HFR, as of 18 Oct 2022. All forecasts are expressions of opinion, are subject to change priming transactions. These are where big new or existing lenders that without notice and are not intended to be a guarantee of future events. Indices are unmanaged. An investor negotiate directly with the company receive new debt with additional cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the collateral that is structurally senior to existing debt; i.e., it has a performance of any specific investment. Index returns do not include any expenses, fees or sales charges, higher priority of repayment if the borrower goes into liquidation. which would lower performance. Past performance is no guarantee of future results. Real results may vary. Also, in a heightened environment for defaults, managers that do not Table shows five significant selloffs in high-yield bonds and the subsequent 24-month returns of the HFRI have restructuring expertise and are unable to negotiate favorable ED Distressed/Restructuring Index. outcomes for their part of the capital structure will likely be left with lower recoveries on distressed debt. Previous periods of market stress have translated into opportunities for hedge fund managers with credit market expertise. We examined the Suitable investors should consider their investment objectives and how high-yield bond market’s five biggest declines: four recessions including these potential opportunities might complement their asset allocation. the global financial crisis as well as the 2015–2016 wave of energy sector defaults. Following those episodes, the average 24-month return for the HFRI ED (Distressed/Restructuring Index) was approximately 45% – FIGURE 4. And that is simply at the index level; in periods of credit market stress and distress, we believe that skillful manager selection may translate into return capture.