Hedge funds generated nearly 30% of U.S. fixed-income trading volume in the year ending April 2007, double the amount they accounted for in the prior 12-month period, according to Greenwich Associates’ 2007 North American fixed-income investors study.
The total value of fixed-income trades executed by the 1,333 institutions participating in the study increased 10% to $25 trillion between April 2006 and April 2007. Fixed-income assets under management in institutional portfolios grew by 7%.
Over the 12-month period covered in the study, trading volume in distressed debt and leveraged loans more than doubled, while trading volume in below investment-grade bonds increased some 40% and trade volume in investment-grade credit bonds increased more than 20%.
According to Greenwich Associates, the accelerated pace of trading was due at least partially to the ongoing advance of hedge funds in the U.S. fixed-income market. “Fixed-income trading volume among hedge funds interviewed in both 2006 and 2007 surged some 90%,” says Greenwich Associates consultant Tim Sangston.
The study highlights that even in the most liquid U.S. fixed-income markets, hedge funds were expanding their presence last year. In U.S. government bonds, hedge funds are now the second-largest source of trading volume after investment funds and advisors, generating some 30% of market volume. They rank as the biggest source of trading volume in interest-rate derivatives, in which they also account for 30% of total U.S. trading volume. Hedge funds generate a quarter of U.S. asset-backed securities (ABS) trading volume, and 20% of volume in mortgage-backed securities (MBS).
“However, it is at the other end of the liquidity spectrum that hedge funds have become the biggest force,” says Greenwich Associates consultant Frank Feenstra. “In structured credit, hedge funds generated nearly half the trading volume reported in the United States over the past 12 months.”
For long-only investment managers and other investors, the impact of hedge funds is not limited to illiquid products. “The hedge fund community and all its capital are the driving force of the markets these days, affecting volatility, liquidity and access to bonds,” comments a portfolio manager from a large investment management firm.