Credit investing is attracting some of Asia’s marquee names looking to take advantage of market dislocations. Hong Kong-based asset management giant Value Partners and Singapore’s alternatives behemoth Dymon Capital Asia have both recently unveiled plans to launch debut alternative credit products.

The pair spearhead a pack of hedge fund managers making moves in alternative credit including private credit, special sits, distressed credit, and high-yield investing, at a time of rising interest rates and challenging market conditions.

Market sources warn these strategies are vulnerable as economic conditions deteriorate and servicing debt becomes more difficult for many corporates. A number of credit and fixed-income strategies in Asia have already faltered this year due to a sharp uptick in volatility, which spawned indiscriminate sell-outs that have damaged portfolios.

Yet, despite perceived headwinds, Dymon hired Donald Ewer, the former PM at multi-strategy firm LIM Advisors, to lead its push into credit. He is tasked with launching a credit fund later this year, the first ever for Dymon in the asset class. The firm quickly doubled down on its efforts by adding Oscar Chow, the former head of credit research at LIM Advisors, to the team.

The firm said recent developments in credit markets make it opportune for the group to launch an institutional-grade credit offering.

Gordon Ip, CIO of fixed income at Val­ue Partners, agrees that now is an attractive time to launch a private credit strategy. Some see the private credit initiative as the first step for Value Partners to transform itself into a de facto provider of financing services to corporates and institutions and so evolve from an asset manager into a bank.

“The environment is particularly good for launching a private credit strategy targeting Chinese companies given how onshore liquidity has dried up as banks have stepped back from lending to corporates,” he says, adding that liquidity was so sparse that the People’s Bank of China (PBOC) recently relaxed reserve ratio requirements to encourage Chinese banks to lend more and boost the economy.

The firm is expecting to hold a first close for the fund in the fourth quarter, with a final close early next year against a target of $550m. Value Partners already runs a credit-focused hedge fund, that was seeded internally last November with $120m. The fund will open to external investors after it completes its 12-month performance in October.

“The strategy does everything that the team sees fit to do in the credit market, including long/shorts, returns swaps, and special situations,” Ip says.

Ip, who runs the credit hedge fund and will take the lead on the private credit strategy as part of his $6bn fixed-income unit, says defaults remain the biggest risk facing private credit funds more so now with the more difficult macro environment. This, he adds, is why it is important that managers immediately identify those who are at risk of failing to pay their debt through bottom-up analysis.

“While many Asian corporates are still fundamentally sound, the increased level of volatility forced selling activities at times and indiscriminately cheapened the whole universe, causing some dislocation in our view,” says Ip.

Ip’s eight-man investment team runs the region’s biggest high-yield bond fund, the $5.5bn long-only Value Partners Greater China High Yield Bond Fund, which has not recorded any yearly losses in the last seven years but finds itself down 2.4% for the first eight months of 2018.

At Value Partners, Ip says his team protected the high-yield bond portfolio from further downside by not aggressively extending both rate and spread durations. The team also sought to take advantage of market dislocation to buy good names on the cheap and made sure to maintain a good level of liquidity, as well as overlaying its macro hedges to mitigate tail-risk events.

Credit has become an important strategy for fund managers in the region in the last few years given the significant growth of the market, according to Jean-Marie Barreau, the COO at Hong Kong-based Triada Capital, an Asian multi-credit strategies specialist.

“A number of multi-strategy Asia-based managers who were primarily focused on equities, macro or private credit, are now adding liquid credit as a core strategy and there is a shortage of experienced portfolio managers with a proven track record in this space,” he says.

In the recent months, according to Barreau, Triada has received many enquiries from institutions who had no prior investment in Asia credit, due to the repricing that occurred in Asian credit markets earlier this year and the relatively attractive valuation levels.

Triada is one of the few hedge funds focused on pan-Asia credits that has maintained a high risk-adjusted performance over the years, showing 15.4% net annualised returns and 4.3% volatility since inception in June 2015. Their strategies gained 16.4% last year, and this year in a market that saw some benchmark high yield bonds repricing as much as 20-30 bond points down from the highs, it was among the few that has posted positive returns this year with +2.1% year-to-date.

Ran Li, the portfolio manager at Hong Kong-based hedge fund L&R Asia, agrees that the region continues to provide significant alpha opportunities if you take the right approach to building your portfolio.

Li says the difficult rates and credit cycle this year requires managers to step up their game and focus on the importance of bottom-up credit selection and fundamental research. “If you run a highly levered long-only portfolio with no solid credit differentiating skillsets then it is a very tough one. But if you know how to position using long/short credit strategies and dynamic hedging tools, you’ll do very well in this part of the cycle.”

Li, former proprietary fixed-income trader at Nomura Global Capital, launched at the start of December and raised $350m from investors – including high-net-worth individuals, family offices and institutions in the greater China region.

The firm has also just hired Larry Chi, the former head of corporate banking and securities for China at Deutsche Bank, who will join as partner.

Li’s credit strategy at L&R, which has about 80-90% of the portfolio focused on Asia credits with the rest in global emerging markets, delivered a high single-digit performance in the first nine months this year.

Li says the share of global emerging market names in the portfolio will grow in the coming months as her team focuses on high-yields, adding that she is looking hire two more portfolio managers to focus on non-China and non-Asia opportunities in years to come.

Thomas Chan, the co-founder of Primas Global Credit Fund, says his team is looking at possibly launching a strategy focused on high-yield bonds and loans in a follow-up their global credit fund they launched in August.

Chan’s team successfully launched the Primas Global Credit fund in August raising almost $200m. The strategy, which deploys various techniques including relative value and long/short, invests about 70% of the money in mature G7 markets; and the rest in emerging markets such as Russia, China and Latin America.

“It is very timely to explore the area now given the strong supply of new issues, but a key challenge is the bearish sentiment towards all asset classes recently with many investors opting to keep their cash,” says Chan.

Notwithstanding the buoyant interest for the asset class, Triada’s Barreau says it remains challenging to launch a new Asia-focused liquid credit fund, given most allocators do not look at Asia credits as an asset class separately from global emerging market debt, so Asia credit funds in liquid instruments compete with all emerging markets for the allocators’ attention.

While there are plenty of naysayers who fear unstable market conditions could undo credit strategies, there are those willing to sail into choppy waters in search of yield.

Alt credit draws Asia’s big names on AsiaHedge.