Founder Andrea Seminara believes the opportunity set is only just beginning in investment-grade credit.

In 2014, Andrea Seminara saw a unique opportunity. The scaling back of bank financing post-GFC altered the lending landscape; private investment vehicles stepped in. Credit and distressed debt investing, helped by rates gradually increasing from their near-zero starting point, became a common investment universe for many hedge funds. Seminara, through his firm, Redhedge Asset Management, had found its focus and set out to exploit the dislocations.

The firm, headquartered in London, invests in market-neutral, short-biased relative-value credit. Investors in this asset class tend to skew long, collecting steady income and accepting crash risk, with the short bias of Redhedge offering a different appeal to investors. Seminara is bullish about this approach and its evolution. “We saw an opportunity to launch a product that didn’t really exist. Now, after more than 10 years, very few firms can execute like us.”

Credit investors typically focus on high-yield or distressed debt, whereas Redhedge focuses on investment-grade credit. This investment focus draws on the unique skill set and experience that Seminara and his colleagues have accumulated during their careers. Some may view it as a paradox: strong, stable companies, where defaults and yields are low, would not be seen as conducive to volatility or an environment where alpha can be generated. Seminara adds that the firm has had to “execute extremely well to generate performance.”

The distinctiveness of the product enables prudent management of downturns, while capitalising on periods of growth. This approach has required consistent updates of strategy, and modelling that has become more sophisticated. This was something the environment demanded; Seminara describes the shift as going from a market “where everything was priced in, and risk was priced in, to the past few years where nothing seems to be priced and chasing relative value returns has to be executed far more carefully.”

The recent tightening of monetary conditions by the Fed upended many hedge fund positions. Inflationary pressures continue to bite, and the AI trade is buoyed by growing expectations rather than fundamentals, so managers want cheap, capital-efficient ways to hedge duration exposure. This dynamic is pushing the price of futures higher and widening the basis. In this environment, Redhedge aims to exploit the mispricing this creates. According to Seminara, “investors are chasing absolute yield because they want to lock in, effectively calling the peak in interest rates. This is understandable, but harder when you do it through risky credit, such as subordinated debt.” Moreover, the current hyperscale debt issuance, now 10% of all USD investment grade, is a continued point of note, with Seminara categorising current spreads as “unsustainable.”

Given this backdrop, Seminara is keen to keep a fluid approach and continue to demonstrate the diversified offering that Redhedge has. The firm’s success since its inception has been built on compounding its existing investment structure, growing its investor base, and demonstrating durable and consistent returns. Pivoting into different areas within the credit investment universe would not be conducive to the firm’s approach, as it lacks the expertise to have an identifiable edge to investors. “For us, by hiring and expanding, we develop expertise in specific subsectors. And then we can evolve within those subsectors quite organically, as our portfolio managers take on more responsibility.”

This natural evolution has a unique appeal for investors who want a component of a portfolio that is uncorrelated with their primary bucket. However, Seminara notes this can be a double-edged sword: “Some investors love our uniqueness. But our focus can have a natural limit, as many need to tick boxes and assess how a manager has performed relative to its peer group.” Rather than deterring investors, this reflects the firm’s distinctness and durability. Its plan to have a US presence in the foreseeable future points to the scalability of the firm.

Before we finish, Seminara is keen to stress the size of the European investment-grade credit universe, roughly $3.5tn according to the Bloomberg Euro Aggregate Corporate index, compared with $800bn for the high-yield and leveraged-loan market, based on M&G Investments’ figures. An important distinction: several of the biggest hedge funds, such as Elliott, have assets comfortably north of $50bn. When you consider that Redhedge is considerably smaller, in a market more than four times the size, the journey is just the beginning.