Long/short strategies come into focus after the three-decade bull market in bonds Following a 30-year bull market in bonds, the implications of entering a rising-rate environment has most investors puzzled. For as long as many investors can remember, fixed-income allocations have always been the “safe” parts of their portfolios. Yet, with interest rates at historic lows due to unprecedented government stimulus over the past few years, investors have been forced to take on more risk in search of yield. That has led many bonds to be “priced for perfection,” as the lower yields often might not compensate for the risk associated with those securities, much less the decline in bond prices that accompanies a rising-rate environment. Therefore, with a Federal Reserve rate hike likely to occur this year, further upside in credit is limited, at best, and we believe it is crucial to protect against the potential downside. Investors have been given a second chance to diversify their fixed-income allocations. Going into 2014, the consensus expectation was that rates would increase, yet they ended up declining even further. Coming into 2015, the consensus is that rates will remain under control, and given Fed Chairwoman Janet Yellen’s comments last month, the earliest possible hike might not come until September. However, as we saw in the summer of 2013 when Ben Bernanke’s statements incited a so-called “taper tantrum,” it does not take a large move in rates to cause a significant sell-off in credit markets — in fact, even the fear of an impending hike could be sufficient to spark a move. That is the reason we believe it can pay to hold true long/short credit exposure as we approach a rising-rate environment.Not only do the short investments in long/short credit funds provide effective buffers, but they can also enhance returns significantly based on the manager’s credit-picking skill. While traditional fixed-income allocations might offer the same ability to take long positions in the bonds of undervalued companies, the ability to short the bonds of weaker companies, or to buy protection on them in the form of credit default swaps, can act as a powerful hedge and return-enhancer when the credit market cracks. This can be a compelling bond alternative for investors who want credit exposure that is not dependent on market direction. We have always believed in the value of having exposure to this less directional approach to investing in both bonds and stocks, and recently increased our exposure to long/short credit given the fixed-income opportunities available in today’s environment. The distinct ability of these managers to fundamentally analyze companies to determine the winners and losers in different economic cycles, and then apply that analysis toward building a balanced book of both long and short investments, can create a defensive portfolio for various market environments. Not only do the short investments in long/short credit funds provide effective buffers, but they can also enhance returns significantly based on the manager’s credit-picking skill. Long/short credit strategies are particularly compelling when managers look beyond the fundamentals of the companies to consider the market dynamics as well. For instance, if capital were to continue to flow into fixed income, then it is important that managers do not “fight the market” — they must be willing and have the flexibility to dynamically adjust their positioning, which can help them monetize the current market while maintaining safeguards to protect the portfolio should the tide turn. This type of active management and trading can be critical in times of higher market volatility. It is widely anticipated that the increased volatility and dispersion will persist this year, and given current credit valuations and the upcoming Fed tightening, fixed-income investors need to take steps to cushion themselves. Therefore, we believe it can be very valuable to hold exposure to credit strategies that can invest both long and short. Not only do those strategies have the potential to protect capital in down markets, but they also have the ability to profit from them in a conservative, flexible and defensive manner. Dorothy C. Weaver has served as principal, chairman and CEO of Collins Capital since co-founding the firm in 1995. She formerly was chairman of the Federal Reserve Bank of Atlanta, Miami branch.