By Neil O’Hara
Credit-oriented hedge funds have been on a roll for two years, but it won’t be long before the Federal Reserve tries to end the party. The central bank is getting ready to back away from the easy monetary policy it has pursued ever since the financial crisis erupted in late 2008, ending its second round of quantitative easing in June. It is a question of when, not whether, the Fed will begin to nudge interest rates higher—and put credit hedge fund managers to the test.
The credit-focused hedge funds tracked by AR returned 33.48% on average in 2009, a banner year for credit strategies, and gained another 14.55% in 2010. Now, however, managers face a tougher environment—but they still have a few tricks up their sleeves to keep making money.
Fixed-income securities prices have an inverse relationship to interest rates, so...