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Hedge fund trading volumes up 36 per cent

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Hedge funds are quickly regaining some of the clout they lost in US fixed income markets during the market meltdown, a study by Greenwich Associates suggests.

The study shows that while overall US fixed income trading volume declined from 2009 to 2010, hedge fund trading volumes jumped some 36 per cent among a matched sample of institutions.

Such growth demonstrates that although hedge funds are far from the dominant force they were in 2006 to 2007, they remain key players in US fixed income markets.

At their pre-crisis peak, hedge funds were generating 29 per cent of all US fixed income trading volume. By 2009 that share had declined to just 12 per cent. This year, hedge funds generated 19 per cent.

“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 US treasuries. Looking at a matched sample of investors, hedge fund trading volume in government bonds increased by approximately 73 per cent from 2009 to 2010. In 2009, hedge funds generated only about three per cent of trading volume in government bonds; in 2010 that share jumped to approximately 20 per cent. 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 per cent from year to year.

Hedge funds increased their share of total investment-grade credit trading volume to 26 per cent in 2010 from 16 per cent in 2009.

“Hedge funds now account for about 42 per cent 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 per cent of total trading volume in high-yield credit, including 37 per cent in cash bonds and 63 per cent in CDS and index products.

Hedge funds maintain a large presence in fixed income products that have fallen out of favour among many US 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 per cent of total trading volume in distressed debt, more than half of trading volume in leveraged loans, and more than a quarter in emerging markets.”

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