Risk premiums on corporate credit entered 2009 at near-record levels and show little sign of a reversal in the near term. These risk premiums certainly appear attractive, although the outlook is clouded by a bleak economic backdrop, rising defaults and a global financial system in the throes of recapitalisation. The question of whether now is the time to raise allocations to credit versus other asset classes is certainly pre-occupying many investors. After all, the historically high risk premiums, and relatively ‘cheap’ price of securities are clearly a reflection of a high-risk environment.

The events of the past several months have been unsettling for investors. With mounting concerns about a global recession and a near shutdown of the capital markets, the FTSE 100 has delivered its worst YTD return since 1931. The market has been characterised by fear, panic and forced selling, as mutual funds and levered hedge funds face record redemptions. For those that remain in equities, the top objective has been safety, as cash-rich companies have outperformed those with arguably better growth prospects.

In the past fortnight hedge funds have been tarnished with a critical brush by investors and the media. On the one hand due to “disappointing returns” and also the downward spiral in equity prices as well as commodity speculation. These wide sweeping statements are not completely accurate and the activities of a few should not unjustly implicate the industry as a whole.

A year on from the credit crunch it is time to evaluate where portfolios are standing. At first glance it certainly appears to be a gloomy picture. We believe tighter credit conditions, increased defaults on loans and mortgages by consumers and bank write-downs will continue to create a challenging environment in the year ahead.

Through the latter part of 2006 and the beginning of 2007, the UK press was full of reports about the good returns enjoyed by what were termed ‘the barbarians at the gate’ – private equity managers. By taking advantage of freely available and modestly priced lending over the past few years, deals became increasingly leveraged and the market witnessed a wealth of large public-to-private transactions.