As for pension plan interest, Mr. Nipp said pension plans are still in the early innings in showing interest in bond products that do use these tools. "There are some plans that are very comfortable with using those tools, there are some that aren't, and then there's every one in between," he said.
The $13.5 billion Alaska Retirement Management Board, Juneau, recently announced it would seek "higher-alpha" strategies for its $3 billion fixed-income portfolio.
Active fixed-income managers such as JPMorgan Investment Management, New York; INVESCO, Atlanta; Ryan ALM Inc., New York; and UBS Global Asset Management, Chicago, have launched or are planning to launch innovative structured fixed-income products for pension plans that are seeking stronger returns from their bond portfolios.
Karen McQuiston, senior vice president in the long-duration bond team at JPMorgan, said low returns in nearly all asset classes are leading money managers to offer innovative strategies. "This is happening in all areas, not just fixed income," she said. "Managers and clients are evolving together. Managers have been taking small steps in the structured product area until clients were ready to implement them."
Structured fixed-income comprises "any fixed-income product that uses multiple strategies such as leverage or derivatives, that enables the investor to do things that he or she could not have done simply by investing in the underlying security," said Keith Styrcula, president of the Structured Products Association, New York,
One strategy that has piqued the interest of institutional investors is carry trades, noted Dan Fuss, vice president and high-yield portfolio manager at Loomis, Sayles & Co., Boston. A carry trade is an arbitrage play in which an investor will borrow assets at low, short-term rates and invest in longer term, higher yielding securities. Mr. Fuss said that such trades have also pumped liquidity into the high-yield and emerging market debt markets, bringing yields down.
Also, collateralized default swaps have allowed managers to create long-short bond funds that are less costly than a long-short fund that uses traditional shorts.
The High-Yield Long-Short strategy from Barclays Global Investors, San Francisco, takes positions on investment-grade and high-yield bonds and allocates 10% of the portfolio to structured credits such as synthetic securities or tranches of collateralized debt obligations, as well as buying and selling credit protection via credit default swaps. The fund, launched in 2004, was one of the first of its kind for pension funds and other institutional investors, and it has been well-received. The fund has a cap of $1 billion, said Lance Berg, spokesman, although he declined to say whether that cap has been reached.