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The results of Greenwich Associates’ 2010 U.S. Fixed-Income Investors Study reveal that while overall U.S. fixed-income trading volume declined from 2009 to 2010, hedge fund trading volumes jumped some 36% among a matched sample of institutions. Such growth demonstrates that although hedge funds are far from the dominant force they were in 2006–2007, they remain key players in U.S. fixed-income markets.

Hedge Funds Focusing on More Liquid Products
At their pre-crisis 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%. “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.”

The most obvious example of this shift can be seen in U.S. Treasuries. Looking at a matched sample of investors, 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%. Although hedge funds still make up only a small part of the market for agency securities, their trading volume in this product increased more than 60% from year-to-year.

Hedge funds increased their share of total investment-grade credit trading volume to 26% in 2010 from 16% in 2009. “Hedge funds now account for about 42% of total trading volume generated in investment-grade credit default swaps and index products,” says Greenwich Associates consultant Frank Feenstra. Hedge funds also generate about 46% of total trading volume in high-yield credit, including 37% in cash bonds and 63% in CDS and index products.

Large Presence in Out-of-Favor Products
Hedge funds maintain a large presence in fixed-income products that have fallen out of favor among many U.S. institutions as a result of their historically poor performance and role in the global market crisis. For example, hedge funds 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.” Corporate website: www.greenwich.com

- FG