Hedge Funds Coming Back in 2010

Hedge funds are regaining some of their fixed-income trading clout they lost during the worst of the financial crisis, according to a new report.

The past 12 months have seen a shift in hedge fund focus to more liquid credit products, according to the report from financial services consultancy firm Greenwich Associates.

The most obvious impact has been in hedge fund activity in U.S. Treasuries, with hedge fund trading volume in government bonds increasing 73% from 2009 to 2010.

The shift to liquid products reflects both changes in the firms’ investment strategies as well as the liquidity from institutional investors, the report said.

The Greenwich Associates report was compiled from interviews with institutional investors active in fixed income.

In 2009, hedge funds generated only about 3% of trading volume in government bonds, the report said, while in 2010 the funds’ share jumped to about 20%.

Despite the increased activity in more liquid products, hedge funds are most heavily represented in less liquid credit securities.

“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,” said Greenwich Associates consultant Peter D’Amario.