Wednesday, July 23, 2008

Greenwich: Hedge funds pull back from fixed income

(FT Alphaville) Hedge funds are pulling away from fixed-income investments, even as banks and “real-money investors” are ramping up their holdings, according to Greenwich Associates.

In its annual US fixed -income investors study for 2008, Greenwich noted a dramatic turnaround from past years as trading volume among US hedge funds was flat to slightly lower from 2007 to 2008. Meanwhile, trading volume grew strongly among banks and real-money investors.

Even so, Lehman Brothers notched up the lead, with the largest and most highly rated fixed-income franchise among US hedge funds, despite the fact that both Lehman and number-two ranked JPMorgan lost hedge fund trading share from 2007 to 2008, says Greenwich.

The next three in the survey’s list of top five dealers to hedge funds are Goldman Sachs, Deutsche Bank and Morgan Stanley.

US fixed-income trading volume increased 12 per cent in the volatile months of 2007-2008, an increase that follows a period of comparable growth in 2006-07 and even stronger growth the prior year. Trading volumes in high-grade flow credit derivatives increased by more than 15 per cent from 2007 to 2008; in high-yield flow credit derivatives, trading volumes were up slightly less than 10 per cent.

As a result of the continued growth in trading volumes among other types of investors, the share of total US fixed-income trading volume generated by hedge funds declined to just 20 per cent in 2007-08 from 29 per cent the previous year, according to Greenwich consultant Tim Sangston.

Nevertheless, absolute hedge fund trading volumes increased in high-yield credit products, leveraged loans and structured products - most likely reflecting the de-leveraging of hedge fund fixed-income portfolios that has been unfolding over the past year.

And, of course, hedge funds play a much bigger — and in some areas, dominant — role in the trading of individual products. According to Greenwich, hedge funds represent:

  • 95 per cent of US trading volume in distressed debt
  • 61 per cent in high-yield credit derivatives
  • 60 per cent in structured credit
  • 55 per cent in leveraged loans

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