Hedge funds return to fixed-income trading

Date: Thursday, August 12, 2010
Author: James Langton, Investment Executive

Managers refocusing their attention onto more liquid products

Hedge funds are becoming bigger players in U.S. fixed-income markets once again, according to new research from Greenwich Associates.

A recent study by Greenwich found that overall U.S. fixed-income trading volume declined from 2009 to 2010, but hedge fund trading volumes jumped 36% over the same period. This has hedge funds regaining some of their share of fixed-income trading, which was surrendered in the wake of the financial crisis.

Greenwich says that at their peak, hedge funds were generating 29% of all U.S. fixed-income trading volume. By 2009 that share had declined to just 12%. This year, hedge funds generated 19% of trading volume, it says.

“Hedge funds over the past 12 months have been refocusing their attention onto more liquid products,” says Greenwich Associates consultant Tim Sangston. “This change in approach reflects both shifts in investment strategies and the impact of liquidity demands on the institutions that supply a growing share of hedge fund capital.”

Greenwich says that the most obvious example of this shift occurs in U.S. Treasuries, as hedge fund trading volume in government bonds increased by approximately 73% from 2009 to 2010. In 2009, hedge funds generated only about 3% of trading volume in government bonds; in 2010 that share jumped to approximately 20%.

Hedge funds also have a large presence in fixed-income products that have fallen out of favour among many U.S. institutions, Greenwich notes. For example, they now account for almost two-thirds of trading volume in structured credit.

“In other, less liquid products as well hedge funds still represent the bulk of the market, despite their increased activity in more liquid products,” says Greenwich Associates consultant, Peter D’Amario. “For example, hedge funds account for approximately 90% of total trading volume in distressed debt, more than half of trading volume in leveraged loans, and more than a quarter in emerging markets.”