Alternatives

Alpha Over Beta

Jonathan Dorfman Headshot
Jon Dorfman

Managing Principal and Chief Investment Officer, Napier Park Global Capital

Though credit markets finished a strong 2025 in generally positive fashion, broad market exposure this year continues to offer limited compensation for risk as spreads compressed and volatility remained subdued.

In the face of rising idiosyncratic risk, tight credit spreads across sectors are near five-year lows while base rates below year-ago levels reduce all-in yields for passive exposure. Massive issuance has been met by similarly strong demand, offsetting the widening that might otherwise have occurred.1 A significant component of this demand has come from retail and intermediary investors looking to access inherently less liquid assets through daily liquidity structures including exchange traded funds and mutual funds.

 

Broad credit market exposure this year continues to offer limited compensation for risk.

In our experience, periods of prolonged valuation compression tend to unwind when underlying structural imbalances are exposed. These repricings can be swift, and are often catalyzed by one or both of the following:

  • Asset and liability mismatches—where short-duration capital is invested in longer-dated or less liquid assets—creating forced sellers when liquidity is needed
  • Excess leverage applied to assets priced for low default and low volatility, amplifying downside when conditions normalize

With today’s credit market dynamics reinforced by supportive monetary policy and ongoing fiscal spending, we anticipate continued investment outcomes driven not by credit market direction but by selectivity, underwriting discipline and the potential to avoid downside—i.e., alpha over beta.

1Source: Dealogic, Bond Radar, Bloomberg, Pitchbook | LCD, Morgan Stanley Research, BofA Global Research, Intex, KBRA DLD Research; data as of December 31, 2025 (most recent data available).

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This material is for informational purposes only and reflects prevailing conditions and the judgment of the author(s) as of the date of publication, all of which are subject to change. This material should not be relied upon as investment advice; it does not constitute a recommendation to buy or sell a security or other investment; and it is not intended to predict or depict the performance of any investment. This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or consider the specific objectives or circumstances of any investor. We consider the information in this material to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of appropriateness for investment.

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THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.

All investments involve the risk of loss of principal.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

The information presented does not reflect the performance of any fund, strategy or account managed or serviced by First Eagle, and there is no guarantee that investors will experience the type of performance reflected. There is no guarantee that any market forecast set forth in this video will be realized. There is no guarantee that any historical trend referenced herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. The mention of specific securities is not a recommendation or solicitation to buy, sell or hold any particular security and should not be relied upon as investment advice.

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Risk Disclosures

All investments involve the risk of loss of principal.

The value and liquidity of portfolio holdings may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the US or abroad. During periods of market volatility, the value of individual securities and other investments at times may decline significantly and rapidly. The securities of small and micro-size companies can be more volatile in price than those of larger companies and may be more difficult or expensive to trade.

Diversification does not guarantee investment returns and does not eliminate the risk of loss.

Alternative investments can be speculative and are not suitable for all investors. Investing in alternative investments is only intended for experienced and sophisticated investors who are willing and able to bear the high economic risks associated with such an investment. Investors should carefully review and consider potential risks before investing. Certain of these risks include:

  • Loss of all or a substantial portion of the investment;
  • Lack of liquidity in that there may be no secondary market or interest in the strategy, and none is expected to develop;
  • Volatility of returns;
  • Interest rate risk;
  • Restrictions on transferring interests in a private investment strategy;
  • Potential lack of diversification and resulting higher risk due to concentration within one or more sectors, industries, countries or regions;
  • Absence of information regarding valuations and pricing;
  • Complex tax structures and delays in tax reporting;
  • Less regulation and higher fees than mutual funds;
  • Use of leverage, which magnifies the potential for gain or loss on amounts invested and is generally considered a speculative investment technique and increases the risks associated with investing in the strategy;
  • Carried interest, which may cause the strategy to make more speculative, higher risk investments than would be the case in absence of such arrangements; and
  • Below-investment-grade loans, which may default and adversely affect returns.

Alpha measures the risk-adjusted return of an investment relative to its benchmark index.

Beta is a measure of an investment's price volatility relative to that of the overall market.

Duration is a measure of a bond price's sensitivity to changes in interest rates.

Exchange-traded funds (ETFs) are listed investment vehicles that seek to provide exposure to a benchmark, index or actively managed strategy.

Volatility represents the degree to which an investment’s price has deviated from its average over time.

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First Eagle Alternative Credit and Napier Park are brand names for the two subsidiary investment advisers engaged in the alternative credit business.

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