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Wall Street Journal
By CRAIG KARMIN
August 30, 2007; Page C3
There was a time when debt was considered a boring investment, held primarily by institutions seeking predictable returns or a steady stream of interest payments. A recent study by the consulting firm Greenwich Associates shows how much that's changed.
Hedge funds have quickly become a dominant player in the world of debt. In some corners of the market -- often among the most complex areas -- they are the biggest force by far. Hedge funds are responsible for nearly 30% of all U.S. fixed-income trading, according to the survey.
That level, which reflected activity over a 12-month period through April, was double the amount of trading hedge funds accounted for the previous year. Greenwich found hedge-fund trading comprises 55% of U.S. activity in derivatives with investment-grade ratings, and also 55% of the trading volume for emerging-market bonds.
The rapid rise in hedge-fund trading underscores the changing nature of the debt markets. Unlike many mutual funds that look for stable returns or pensions and insurers that want steady, long-term holdings, hedge funds frequently seek short-term gains through numerous trades they can amplify with borrowed money.
"We've seen over the past 10 years a proliferation of products created to meet the needs of hedge funds," says Tim Sangston, a managing director at Greenwich Associates. "More and more of the growth in bond trading is coming from these kind of professional traders and investors."
In some corners of the U.S. debt market, hedge funds practically are the market. For instance, hedge funds generated more than 80% of the trading for derivatives with high-yield ratings, and more than 85% of volume in distressed debt, Greenwich found.
Hedge funds also accounted for a good portion of the trading in mortgage-backed securities, asset-backed securities, collateralized debt obligations and other parts of the debt market that have suffered recently as worries over subprime loans have spread.
Analysts say these debt instruments were developed primarily for sophisticated investors like hedge funds, which sometimes use these products to protect themselves. But the debt securities have also been peddled to pension funds and other institutions that may not completely understand them.
The survey involved responses from 1,333 institutions in North America, including mutual funds, insurance companies, pension funds, banks, brokerage firms' proprietary trading desks and federal agencies, Greenwich said. These investors were polled about their trading in 15 kinds of debt instruments. Overall, debt-market trading volume among the participants increased by 10% in the period, to $25 trillion, from the previous year.
Write to Craig Karmin at craig.karmin@wsj.com1
URL for this article:
Hedge Funds Do About 30% Of Bond Trading, Study Says - WSJ.com
By CRAIG KARMIN
August 30, 2007; Page C3
There was a time when debt was considered a boring investment, held primarily by institutions seeking predictable returns or a steady stream of interest payments. A recent study by the consulting firm Greenwich Associates shows how much that's changed.
Hedge funds have quickly become a dominant player in the world of debt. In some corners of the market -- often among the most complex areas -- they are the biggest force by far. Hedge funds are responsible for nearly 30% of all U.S. fixed-income trading, according to the survey.
That level, which reflected activity over a 12-month period through April, was double the amount of trading hedge funds accounted for the previous year. Greenwich found hedge-fund trading comprises 55% of U.S. activity in derivatives with investment-grade ratings, and also 55% of the trading volume for emerging-market bonds.
The rapid rise in hedge-fund trading underscores the changing nature of the debt markets. Unlike many mutual funds that look for stable returns or pensions and insurers that want steady, long-term holdings, hedge funds frequently seek short-term gains through numerous trades they can amplify with borrowed money.
"We've seen over the past 10 years a proliferation of products created to meet the needs of hedge funds," says Tim Sangston, a managing director at Greenwich Associates. "More and more of the growth in bond trading is coming from these kind of professional traders and investors."
In some corners of the U.S. debt market, hedge funds practically are the market. For instance, hedge funds generated more than 80% of the trading for derivatives with high-yield ratings, and more than 85% of volume in distressed debt, Greenwich found.
Hedge funds also accounted for a good portion of the trading in mortgage-backed securities, asset-backed securities, collateralized debt obligations and other parts of the debt market that have suffered recently as worries over subprime loans have spread.
Analysts say these debt instruments were developed primarily for sophisticated investors like hedge funds, which sometimes use these products to protect themselves. But the debt securities have also been peddled to pension funds and other institutions that may not completely understand them.
The survey involved responses from 1,333 institutions in North America, including mutual funds, insurance companies, pension funds, banks, brokerage firms' proprietary trading desks and federal agencies, Greenwich said. These investors were polled about their trading in 15 kinds of debt instruments. Overall, debt-market trading volume among the participants increased by 10% in the period, to $25 trillion, from the previous year.
Write to Craig Karmin at craig.karmin@wsj.com1
URL for this article:
Hedge Funds Do About 30% Of Bond Trading, Study Says - WSJ.com