How Low Can You Go?


1963. Limbo fever was in the air, and over the sound system, Chubby Checker egged on his listeners with that question.  When the limbo bar was brought down to a seemingly impossible level, someone at the party managed to squirm by and get that bar dropped to another seemingly impossible level.

Over the past 20 years, global fixed income has taken to limbo and become its greatest practitioner. When nominal global bond yields first approached the sub-1% level in the late 90s, investors and issuers gasped at the few Houdinis who could clear that razor thin spread.  Who would buy debt – let alone long-term debt – that basically preserved capital, assuming zero inflation?  How low can you go?

By 2010, around 20% of global bonds yielded between 0% and 1%.  It took under five years for the global bond market to drop the bar to 0%, asking participants to dance in negative territory. Surely the physics of risk/return would ascertain that no bodily contortion could manage clearing a bar that was below zero?  Yet, the impossible became possible again as about 20% of global bonds had negative yields by mid-2016.  How low can you go?

By June 2020, 60% of the $60 trillion global bond market had yields below 1% nominal, 86% were below 2%, and more than 95% were under 5%.  Given these trends, we are loath to challenge our reigning limbo champ to drop the bar lower.

**Data above courtesy of the Financial Times and ICE Data Services

Most traditional fixed income – including high yield and leveraged loans – have seen spreads collapse over the past few months after widening due to Covid. Yields in July 2020 are back at December 2019 levels.  In contrast, digital private credit assets have seen loss-adjusted net asset yields widen by about 200 – 400 bps.

As current trends point to an extensive period of low (and negative) nominal and real returns, it is time for allocators to consider other fixed income options that can deliver more attractive risk-adjusted returns.

Confidentiality and Non-solicitation: No information herein constitutes an offer or a solicitation to buy or sell any securities or any interests in any product or investment strategy managed by HCG Fund Management LP (“HCG”).  Any offer or solicitation relating to any such investment will be made only by means of confidential offering documents and only in those jurisdictions where permitted by law.
Reliance: This presentation may not be relied upon for investment decision-making purposes. It does not contain all the information necessary to make an investment decision, including the risks, fees, and investment strategies of investment funds advised by HCG. Eligible investors are described in official offering documents, all of which must be read in their entirety and will supersede the information contained herein.  No offer to purchase any securities or interests by a prospective investor will be made prior to receipt of all official documents, and no offer to purchase any securities or interests will be accepted without receipt of all official documentation that has been completed to HCG’s satisfaction.
Opinions — No obligation to update:  The information contained herein represents the views and opinions of HCG.  It is intended solely for informational purposes and is not intended to constitute investment, legal, tax or accounting advice.  The views about digital finance investing and estimated future investment opportunities expressed herein reflect those of HCG management as of the date herein and are a reflection of our best judgment at the time.  They are subject to change based on market and other conditions, and we have no obligation to update.  Actual results, however, may prove to be different from our expectations.  No warranty is given to the completeness or the accuracy of the information contained herein.
Suitability and Risks:  Any such investment is appropriate only for financially sophisticated investors capable of analyzing and assessing the associated risks fully disclosed in the Private Placement and/or Information Memoranda. Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The Private Placement and/or Information Memoranda contain this and other information about the investment. A prospective investor should have no need for liquidity with respect to its investment and should view it as long-term and not a trading vehicle.  Additional risks are disclosed in the Private Placement and/or Information Memorandum including, including, limited liquidity and restrictions on transfer of the securities, dependence on HCG’s principals, and short operating history of certain products. As with all private investment funds, investments are deemed speculative and involve risk of loss.
Third Party Data: We do not verify third party data used in certain calculated metrics shown here. 

This material is confidential and intended to the recipient only. It cannot be republished, reproduced or retransmitted without our permission. No information herein constitutes an offer or a solicitation to buy or sell any securities or any interests in any fund or investment strategy managed by HCG Fund Management LP (“HCG”). Please see here for important additional information.