Alternative Credit 101
You don’t have to be an institutional investor to access the high income potential of alternative credit. Learn about the alternative credit universe and how the WisdomTree Alternative Income Fund, HYIN, provides exposure to this asset class.
Core bond yields continue to rest at very low levels, prompting investors to look beyond traditional fixed income. Sophisticated institutions have turned to alternative income sources, such as direct lending to smaller corporations and real estate, and structured credit, in the search for higher income.
These alternative income sources have come to be known collectively as Alternative Credit, and they typically offer investors the potential for higher expected return in exchange for assuming more risk from default, liquidity, or leverage.
Alternative credit can be segmented into three primary categories: traded credit, structured credit, and private lending.
These investments attempt to provide access to areas of mortgage and corporate debt that extend beyond the reach of many traditional bond products to smaller issuers, more sophisticated structures, and more liquidity risk.
In general, there are three primary attributes that investors may find appealing about this asset class: yield potential, modest historical correlation to equity markets, and low or negative historical correlation to interest rates.
Institutions have typically accessed alternative credit investments through private funds and specialized consultants; a luxury not afforded to most retail investors. But publicly traded closed-end funds, business development companies and mortgage REITs seek to offer retail investors access to the alternative credit universe. The publicly traded alternative credit vehicles, or PACs, are often run by the same prominent investment firms that manage private funds for institutional investors.
The Gapstow Liquid Alternative Credit Index, or GLACI, created by Gapstow, a recognized leader in the alternative credit space, assembles these PACs for diversified exposure across each of the six sectors of the alternative income universe.
The investment selection process for GLACI focuses on the largest vehicles, providing wide coverage of the market, while mitigating concentration risk through equal weighted exposure. The strategic benefits can be enhanced when investing across alternative credit sectors.
As business cycles change over time, there has been a significant rotation in leadership among alternative income sectors. The consumer cycle is different than the corporate credit cycle and having instruments sensitive to each may be valuable when entering the alternative credit space.
While we believe that alternative credit can play a long-term strategic role for asset allocation, there are two reasons to believe that from an investment standpoint, now may be a good entry point.
- In the current low yield environment, investors are increasingly seeking other sources for income as a substitute or a complement to traditional fixed-income products.
- The negative to low correlation to U.S. interest rates lies in the fact that much of the lending within the alternative credit space is done on a floating rate basis, as well as the significant hedging done by many PAC managers. The primary focus is on securing the potential incremental advantage offered by the credit risk, not interest rate risk.
For information the WisdomTree Alternative Income Fund, please contact your WisdomTree representative or visit WisdomTree.com.
Before investing, carefully consider the fund's investment objectives, risks, charges, and expenses contained in the prospectus available at wisdomtree.com. Read it carefully.