Investors Shift Toward Fixed Income Hedge Fund Strategies
Liquidity and transparency have been the watch words of investors since the financial crisis. Recently, however, BHA analysts noted another trend in the hedge fund community. Investors are looking to fixed-income hedge fund strategies for consistent returns, and managers have indicated that they are seeing steady growth in this area.
Before the financial crisis in 2008, hedge funds were largely viewed as vehicles that offered investors an exciting opportunity to earn higher returns by being exposed to slightly higher risks. Since the crisis, investors have been cautious and, as a result, investments in hedge funds have decreased substantially.
However, inflows may be on the rise again. Between April 30, 2009, and April 30, 2010, there was an estimated 36 percent increase in trading volume among hedge funds, according to a survey by Greenwich Associates: “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.”
One reason for the increase is investor interest in fixed-income securities. Prior to the financial crisis, many investors were not as captivated by vehicles such as Treasurys, government bonds, interest rate swaps, and agency securities. They were perceived as boring and had seemingly become out of date. However, in this postcrisis world, interest in many of these staid fixed-income strategies has rebounded among investors and managers alike, and riskier investing has dropped off. The same report noted, “From April 30, 2009 to April 30, 2010, a matched sample of hedge fund survey respondents revealed a 73% increase in Treasury’s 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.”
BHA data supports this trend. About 20 percent of the hedge fund investor mandates that BHA has received over the past month and a half have mentioned an interest in fixed-income and fixed-income arbitrage strategies. But have analysts seen any rise in fixed-income investor interest after April 30, 2010? Indeed, there has been a slight rise. Investors interested in fixed-income and fixed-income arbitrage hedge fund strategies rose 17 percent from May through July. A wealth advisor in London, as well as a family office in Illinois, explained to analysts that they are seeking exposure to sovereign and corporate debt rather than some of the more volatile strategies like global macro.
A sign that this trend may persist at least near term, some hedge fund managers are adding fixed-income funds and expertise to their offerings. A large wealth advisory firm in London is a prime example. It recently hired an experienced fixed-income manager to look over the firm’s UCITS III-compliant fixed-income funds. The chief investment officer said, “The asset class has always played an important role at the heart of our client portfolios, and has made a significant contribution to our long-term performance track record, delivering our clients an annualized return of some 10% per annum.”
Although some investors are still allocating to hedge funds in order to earn large returns by taking on slightly higher risk, many are looking to a variety of debt instruments that can produce more predictable and absolute returns. Although investor interest in this area is rising now, only time will tell if it will continue for the remainder of 2010.