Hedge fund bond strategies: Out of the $1.2 trillion U.S. junk-bond market, hedge funds hold the largest share since the credit crisis, which begs the question whether the borrowed cash will bring more losses once the Fed halts quantitative easing, Bloomberg said. According to Barclays, hedge funds own a little under a quarter of all outstanding high-yield bonds (USD-denominated). This is up from 18% held last year.
Hedge Fund Research and Bank of America-Merrill Lynch indices reveal that credit-focused hedge funds’ assets have almost doubled since the financial crisis. According to a report issued by the U.S. Department of Treasury’s Office of Financial Research, sophisticated investors, among which we can include hedge funds, had a faster reaction to a worsening of market conditions in comparison with retail investors, and chose to redeem “shares from funds more quickly if they perceived liquidity shortfalls.”
In this way, while funds that work with borrowed money have a larger piece of the market, leverage in the system is smaller than it was before the crisis, and credit hedge funds on average also employ less leverage, Bloomberg quoted Barclays’ Bradley Rogoff as stating. The number of the hedge funds in the speculative-grade bond market has increased by 5% this year, versus the same time last year, according to the report.
It its Global Outlook summary, Barclays said that investors should remain overweight equities, but it’d be wise to move allocation toward Europe and Asia-based stocks. “US economic data are unlikely to confirm lift-off in the next couple of months, but conditions are aligned for a significant improvement as we move into 2014 […] This will bring the Fed back into play, cause another leg up in bond yields and could well generate some retracement in stock prices, although most likely from higher levels than where we are now,” Barclays’ Head of Research, Larry Kantor, told Bloomberg.