Hedge Funds Double Share of Fixed-Income Trades
By Jenny Strasburg
Aug. 30 (Bloomberg) -- Hedge funds doubled their share of U.S. fixed-income trading to 30 percent and dominated the market for some securities as debt-market volatility increased, according to a study by Greenwich Associates.
``The recent expansion of hedge-fund positions and trading activity has been so rapid and consistent that it is now no exaggeration to say that hedge funds are no longer just an important part of the market in some fixed-income products; they are the market,'' according to the report, which covered the 12 months ended in April.
Hedge funds accounted for more than 80 percent of trading in the debt of financially distressed companies and high-yield derivatives such as credit-default swaps, the Greenwich, Connecticut-based consulting and research firm said. The loosely regulated investment pools generated almost half of U.S. trading volume in structured credit.
Hedge-fund assets worldwide increased almost threefold in the past five years to $1.75 trillion as of June, according to Chicago-based Hedge Fund Research Inc. Fund managers' appetite for fixed-income assets has fueled growth in trading volume as well as concerns about who might buy the debt products in troubled markets.
Trading by all institutions in distressed debt more than doubled to $42 billion in the 12-month period, according to the report. Leveraged-loan trading doubled to $241 billion. Total debt-trading volume increased 10 percent to $25 trillion.
Hedge funds ``appear more concerned than other U.S. fixed- income investors about liquidity risk,'' according to the study, referring to worries buyers might disappear when trading becomes volatile. By comparison, other investors cited risk of default as their top worry.
Market Casualties
Bear Stearns Cos. last month sought bankruptcy protection for two hedge funds that invested in securities backed by home loans to the riskiest borrowers. The New York-based investment firm closed the funds after granting $1.6 billion in emergency financing in June and then telling investors they would get little, if any, money back.
Credit pools managed by UBS AG's former hedge-fund affiliate Dillon Read Capital Management LLC and Sowood Capital Management LP of Boston also failed this year after the value of their holdings declined and clients sought refunds.
`Take Careful Note'
Hedge funds' share of structured-credit trades shows that the funds ``have become the biggest force'' in markets for many debt instruments that are often are the most complex to price and trade, Frank Feenstra, a Greenwich Associates managing director, said in the report. ``With all of the current issues surrounding subprime-mortgage debt and collateralized-debt obligations, investors should take careful note of this finding.''
About 25 percent of the trading in U.S. asset-backed securities was done by hedge funds. They were responsible for 20 percent of the volume in mortgage-backed securities trading.
Among hedge funds interviewed for the study in both 2006 and 2007, fixed-income trading volume increased about 90 percent, Greenwich Associates managing director Tim Sangston, a former fixed-income associate with Goldman Sachs Group Inc., said in the report.
Greenwich Associates based its report on interviews conducted between February and April with 1,333 mutual funds, pension funds, banks and other institutions.
Holders of fixed-income securities in general traded the instruments more frequently in the past year than previously, Greenwich Associates said. The research firm based that conclusion on data showing trading volume outpacing the rise in debt assets under management.
Comparing Returns
Institutional investors, including corporate and public pension-fund managers and endowments, expected an average return of 5.2 percent from fixed-income assets over the five years starting in 2006, the firm said. Expectations for equities were 8.3 percent; 8.8 percent from hedge funds; and 11.7 percent from private-equity funds.
Hedge fund manager can buy or sell any assets and participate substantially in profits from money invested. Private-equity firms acquire part or all of a company using debt to finance typically about two-thirds of the purchase price. They usually hold investments for three years or more while they seek to increase profits, then try to sell to other companies or investors through an initial public offering.
To contact the reporter on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net .
Last Updated: August 30, 2007 16:02 EDT |
