Liquid Global High Yield: one year of liquidity and rolldown capture

A year on from launch, our Liquid Global High Yield strategy has delivered strong outperformance for investors, behaving exactly as designed. Launched in May 2025 to address liquidity constraints, high costs and persistent underperformance in high-yield investing, the strategy applies our proven quantitative expertise through a systematic, derivatives-based approach. Managed by a dedicated investment team with over a decade of experience in credit derivatives, it has delivered across all objectives.

Read also: Capturing high-yield carry: the benefits of a CDS-based approach

Rethinking traditional high-yield investing

High-yield (HY) corporate bonds offer attractive long-term return and income potential. However, traditional approaches – both active and passive – face structural drawbacks: liquidity is limited, performance often lags benchmarks, and costs, which include swing pricing during market stress, are high.

LGHY addresses these challenges through a systematic framework that combines high-quality treasury debt with credit default swap (CDS) indices – highly liquid baskets of credit risk that enable efficient implementation at a fraction of the cost. By providing synthetic exposure to credit, the strategy replicates bond cashflows and delivers potential outperformance while avoiding the liquidity constraints of physical markets. Bid-ask spreads are significantly lower than bonds, supporting a competitive total expense ratio (TER) well below the median TER, which sits above 0.7% for global high yield funds.

Read also: A better way to invest in high yield: solving liquidity, cost and performance issues

Outperformance driven by rolldown

In its first year, LGHY delivered standout returns of 2.25%² (gross of fees) above the benchmark (see Figure 1), with the performance drivers highlighted in our developmental research delivering as expected and underscoring the strength and consistency of the strategy’s implementation. Initially launched with assets under management (AUM) of USD 55 million, AUM has grown substantially since then, standing at USD 460 million on 30 April 2026.

FIG 1. Liquid Global High Yield strategy composite³ gross 1-year performance vs benchmark

Fig 2. Liquid Global High Yield strategy summary risk indicator⁴

Performance has been driven primarily by capturing rolldown returns in CDS markets, where upward-sloping curves contrast with flatter or inverted cash bond curves. This synthetic versus cash basis is the key driver of long-term outperformance for the strategy. The index roll events – in September 2025 and March 2026 – both expressed significantly positive roll dynamics, enforcing our view that the outperformance driver remains well intact.

Performance attribution: a bespoke approach

Because the performance of LGHY is largely driven by the cash-synthetic basis, traditional performance attribution approaches are less appropriate. Instead, we split the fund’s gross performance versus the benchmark into a ‘strategy tracking error (TE)’ and an ‘implementation TE’.

• Implementation TE: Defined as the difference between the gross fund performance and the strategy tracking error — in an idealised case, this should be low for a systematic strategy
• Strategy TE: This is defined as the performance of the synthetic strategy vs the cash benchmark.

As explored extensively in our prior research, the strategy tracking error can be split into two components: the composition effect and the basis effect⁵, with the latter being the key driver of long-term outperformance for the strategy.

Figure 3 shows that in its first year, the fund has outperformed the benchmark by 2.25% gross of fees⁶, through a combination of composition (1.2%) and the basis effect (1.34%). Hedging performance has been negative, which is to be expected given that markets have recovered rapidly from stress rather than experiencing a major liquidity shock. Importantly, the annual basis-driven outperformance has largely tracked the long-term target from our historical simulation. 

FIG 3. Decomposition of Liquid Global High Yield strategy composite³ gross 1-year performance vs benchmark⁷

Built to perform through stress

The market crisis caused by the conflict in Iran provided the strategy with its first major test – which it navigated exactly as our research would suggest.

In the early stages of market shocks, CDS spreads widen faster than cash bond spreads, as investors seek to utilise the more liquid instrument to hedge, rather than reducing risk by selling illiquid bonds and facing elevated trading costs. Indeed, this materialised in the first weeks of March 2026, seeing the fund underperform the benchmark. However, our research shows that such basis underperformance is mean reverting, as after the initial CDS underperformance, markets have historically developed in one of two manners:

1.  The situation deteriorates, triggering funds outflows and a ‘dash for cash’ – i.e. investors selling bonds en masse. Such a scenario sees cash bonds underperform as one way liquidity sends trading costs substantially higher
2.  The situation improves and markets recover, seeing CDS spreads retrace the underperformance as spreads return to the pre-shock level.

Thankfully, the latter scenario prevailed through April, prompting a sharp retracement of the basis underperformance and restoring the fund return to its pre-shock relative highs against the benchmark.

At the same time, as shown in Figure 4, credit derivatives volumes were markedly higher than bonds, supporting robust liquidity. And the strategy’s lack of swing pricing helped investors avoid implicit costs from dilution.

FIG 4. Trading volumes of credit derivatives vs US HY bonds⁸

Ultimately, although market stress was elevated, having a clear understanding of what was generating the momentary underperformance and a research-backed expectation of imminent recovery enabled us to guide client expectations through turbulent market conditions and deliver as expected.

Looking ahead

Liquid Global High Yield was developed from our conviction that traditional approaches to the asset class were broken. Capturing the high-yield opportunity has long been constrained by poor liquidity, persistent underperformance and punitive costs – both through ongoing charges and swing pricing during periods of market stress.

In its first full year, LGHY has fully addressed these shortcomings, providing superior liquidity through adverse market conditions alongside strong outperformance – at a TER significantly below the average, further enhancing the realised return for our clients. Looking ahead, we see a highly attractive outlook for the strategy, offering investors liquid high-yield exposure with potential for continued outperformance across unpredictable market environments.