Hedge funds expand presence in fixed-income market

NEW YORK Wed Aug 22, 2012 1:17pm EDT

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NEW YORK (Reuters) - U.S. hedge funds accounted for nearly a quarter of bond trading in the U.S. between April 2011 and April 2012, the most in five years and highlighting the greater presence of hedge funds in the U.S. bond industry, a survey released this week from consulting firm Greenwich Associates found.

Hedge funds generated 24 percent of the overall volume of fixed-income trading in the U.S. over the year period, a more than 30 percent increase from 18 percent in April 2011 and surpassing the growth in bond trading from the other managers and institutions surveyed.

The 24 percent share is also the highest since April 2007, when hedge funds accounted for 29 percent of overall volume in U.S. bond trading, the Stamford, Connecticut-based firm found.

U.S. Treasuries, the traditional safe-haven for risk-averse investors, have been drawing big demand over the last few years even though they offer only the slimmest of returns, while U.S. equity mutual funds have racked up big outflows.

Investors have been seeking Treasuries and high-quality debt as global uncertainty from the European debt crisis, stock market volatility, and high U.S. unemployment have sparked a flight to safety as well as a search for yield.

Hedge funds were active in U.S. government bonds and increased their share in that market from 13 percent as of April 2011 to 24 percent as of April 2012, the highest since taking up 29 percent of the market in the period ended April 2007.

Some hedge funds have also opted to play the corporate bond market to avoid the volatility in stocks that has hurt hedge fund performance since 2010, said Mazin Jadallah, chief executive of AlphaClone, an investment research firm that tracks hedge funds.

Over 300 hedge funds were included in the survey of 1,085 U.S. institutional investors between February and April 2012.

U.S. bond funds have benefited from investors' distaste of equities, attracting 41 straight weeks of new money from investors worldwide, according to fund-tracking firm EPFR Global.

While other types of funds and advisers such as mutual funds still make up 46 percent of trades in the bond market, that percentage is only a 14 percent increase from the 42 percent the funds posted last year, after accounting for changes in total volume of fixed income trading from 2011 to 2012.

(Reporting by Sam Forgione; Editing by Jennifer Ablan and M.D. Golan)

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