Hedge Funds 30% of U.S. Institutions' Fixed Income Trading

August 30, 2007 (PLANSPONSOR.com) - Hedge funds generated nearly 30% of U.S. fixed-income trading volume last year among the 1,333 institutions participating in Greenwich Associates' 2007 North American Fixed-Income Investors Study.

According to a Greenwich Associates press release, total trading volume among the 1,333 institutions increased 10% to $25 trillion last year. Over the 12-month period covered in the study, trading volume in distressed debt and leveraged loans more than doubled, while trading volume in below investment-grade bonds increased 40% and trading volume in investment-grade credit bonds increased more than 20%.

Greenwich Associates attributed the accelerated pace of trading at least partially to the ongoing advance of hedge funds in the U.S. fixed-income market. “Fixed-income trading volume among hedge funds that interviewed in both 2006 and 2007 surged some 90%,” said Greenwich Associates consultant Tim Sangston, in the press release.

The study found hedge funds generate:

  • more than 55% of U.S. trading volume in liquid or “flow” derivatives with investment-grade ratings and more than 80% in high yield derivatives,
  • more than 85% of U.S. trading volume in distressed debt,
  • nearly 55% of U.S. trading volume in emerging market bonds, and
  • more than 40% of U.S. leveraged loan trading volume.

In addition, according to the press release, the study found:

  • In U.S. government bonds, hedge funds are now the second-largest source of trading volume after investment funds/advisers, generating 30% of market volume.
  • Hedge funds rank as the biggest source of trading volume in interest-rate derivatives, in which they also account for 30% of total U.S. trading volume.
  • Hedge funds generate a quarter of U.S. asset-backed securities (ABS) trading volume, and 20% of volume in mortgage-backed securities (MBS).

“However, it is at the other end of the liquidity spectrum that hedge funds have become the biggest force,” Greenwich Associates consultant Frank Feenstra added. “In structured credit, hedge funds generated nearly half the trading volume reported in the United States over the past 12 months.”

More from Greenwich Associates can be found at  www.greenwich.com .