Hedge funds are making a comeback in U.S. fixed-income markets, with an estimated 36% increase in trading volume between April 30, 2009, and April 30, 2010, Greenwich Associates reports.
The results are from a “matched sample” of roughly 120 hedge funds that responded to both the 2009 and 2010 Greenwich surveys, said Greenwich consultant Tim Sangston.
The total trading volume among the 245 hedge funds that responded to the 2010 survey jumped to $4.7 trillion from $2.8 trillion in the year ended April 30, Mr. Sangston said.
During that 12-month period, hedge funds refocused their attention on liquid products, which reflects a shift in investment strategies and liquidity demands of institutions that supply hedge fund capital, he said.
At their pre-crisis peak in April 30, 2007, hedge funds generated 29% of U.S. fixed-income trading volume. That percentage had dropped to 12% by April 30, 2009, but had rebounded to 19% by April 30, 2010, Mr. Sangston said.
“In 2006 and 2007, we were seeing major dealers (sell-side organizations in fixed income) focusing on hedge funds to the extent that if you weren't a big hedge fund, you weren't getting the attention of the major dealers,” Mr. Sangston said. “The biggest money accounts were down-tiered in priority because hedge funds were generating the really interesting products. They were generating a lot of revenue and boring stuff like Treasuries were out of fashion.”
When the “exciting business” dropped off because of the financial crisis, there was a refocusing on fundamental fixed-income investments, such as investment-grade Treasuries, agency securities, interest rate swaps and high-yield cash investments, Mr. Sangston said.
“That's where we saw the decline in the proportion of volumes in hedge funds,” he said.
From April 30, 2009 to April 30, 2010, a matched sample of hedge fund survey respondents revealed a 73% increase in Treasurys trading volume. Hedge funds constituted 3% of trading volume in government bonds as of April 30, 2009. That share in trading volume jumped to about 20%, as of April 30, 2010, increasing 60% year-over-year.
Investment-grade trading volume increased 10 percentage points to 26% from April 30, 2009 to April 30, 2010.
“Hedge funds now account for about 42% of total trading volume generated in investment-grade credit default swaps and the index products,” Greenwich consultant Frank Feenstra said in a Greenwich news release.
Now that several hedge funds have closed shop or merged with other hedge funds and financial institutions, the markets have stabilized, resulting in a bounce back in hedge fund trading volume, Mr. Sangston said.