U.S. Fixed Income: Hedge Funds Expand Influence

Fixed-income trading volume generated by U.S. hedge funds increased more than 30% from Q2 2011 to Q2 2012, according to the results of Greenwich Associates 2012 North American Fixed-Income Study. That growth far surpassed the 20% increase in trading volumes among all institutions and a 14% pick-up in trading volumes among other types of funds and advisors. As a result, hedge funds increased their clout as a source of U.S. fixed-income activity.

In 2011 hedge funds generated 18% of overall fixed-income trading volume in the United States. In 2012 that share grew to 24%. "However, reflecting the broader trends in market trading flows, hedge fund trading volumes in investment-grade credit actually dropped roughly 60% during the period in our study - even as their overall fixed-income volume grew substantially," says Greenwich Associates consultant Tim Sangston. "Meanwhile, hedge fund government bond trading volumes more than doubled."

As a result of the sharp pick-up in hedge fund trading activity, these investors are expanding their presence within individual fixed-income products. In U.S. government bonds, for example, hedge funds in the year ending Q2 2011 generated just 13% of total U.S. trading volume. In the same period ending in Q2 2012, hedge funds accounted for almost a quarter (24%) of volume. In distressed debt and high-yield credit derivatives, hedge funds generated more than 70% of total trading volume in the year covered in the research