Investor Interest in Fixed-Income Funds
During the past month, BHA analysts have noticed an increase in the number of investors seeking fixed-income funds. Toward the end of December, of investors BHA interviewed, 18 percent were seeking fixed-income funds. During the first two weeks of the new year, nearly 25 percent of investors were interested in this strategy.
Fixed-income convertible arbitrage funds had the strongest performance of all fixed-income funds in 2009, returning 58.43 percent.1 This was due in no small part to the rebound of the equity markets, which increased the value of the underlying convertible bonds.
In addition to outstanding performance, investors were attracted to fixed-income funds because they cut back on their levels of leverage. In April 2009, fixed-income funds’ averaged 2.7 times leverage; however, by September, that number had dropped to 1.6. This was a dramatic change from October 2006 when funds’ use of leverage was 7.2.2 The reason for this drop was again favorable market conditions. As equity markets gained strength, returns increased and made the use of leverage less necessary. 3
Leverage has not been popular with investors. Those that BHA analysts spoke with said they were looking for low-leveraged funds. For example, a private bank based in Munich, Germany, that is interested in fixed-income arbitrage funds stated that it will invest with only fixed-income funds that are not highly leveraged. The bank believes that there is no need for significant amounts of leverage given the current opportunities in the market.
If fixed-income funds can continue to take advantage of the credit markets and avoid borrowing, they should continue to be popular with investors and perform well in the coming months.
1 FINAlternatives, “Convertible Arbitrage Hedge Funds Soar in ’09, Most Other Strategies Rally,” January 11, 2010.
2 The Wall Street Journal, “Financial News: Fixed-Income Hedge Funds Spurn Leverage,” November 8, 2009.
3 The Wall Street Journal, “Financial News: Fixed-Income Hedge Funds Spurn Leverage,” November 8, 2009.