Hedge Funds Do About 30% Of Bond Trading -- quote from WSJ

Hedge Funds Do About 30% Of Bond Trading, Study Says By CRAIG KARMIN August 30, 2007; Page C3 There was a time when debt was considered a boring investment, held primarily by institutions seeking predictable returns or a steady stream of interest payments. A recent study by the consulting firm Greenwich Associates shows how much that's changed. Hedge funds have quickly become a dominant player in the world of debt. In some corners of the market -- often among the most complex areas -- they are the biggest force by far. Hedge funds are responsible for nearly 30% of all U.S. fixed-income trading, according to the survey. DOMINATORS • The News: A study shows how important that hedge funds have become in debt trading -- they do nearly 30% of U.S. bond volume. • Doubled Up: The amount of trading doubled in just a year, the study by Greenwich Associates showed. • Impact on Investors: This isn't your father's debt. Hedge funds often focus on short-term goals, not the long-term holdings that other investors may prefer. That level, which reflected activity over a 12-month period through April, was double the amount of trading hedge funds accounted for the previous year. Greenwich found hedge-fund trading comprises 55% of U.S. activity in derivatives with investment-grade ratings, and also 55% of the trading volume for emerging-market bonds. The rapid rise in hedge-fund trading underscores the changing nature of the debt markets. Unlike many mutual funds that look for stable returns or pensions and insurers that want steady, long-term holdings, hedge funds frequently seek short-term gains through numerous trades they can amplify with borrowed money. "We've seen over the past 10 years a proliferation of products created to meet the needs of hedge funds," says Tim Sangston, a managing director at Greenwich Associates. "More and more of the growth in bond trading is coming from these kind of professional traders and investors." In some corners of the U.S. debt market, hedge funds practically are the market. For instance, hedge funds generated more than 80% of the trading for derivatives with high-yield ratings, and more than 85% of volume in distressed debt, Greenwich found. Hedge funds also accounted for a good portion of the trading in mortgage-backed securities, asset-backed securities, collateralized debt obligations and other parts of the debt market that have suffered recently as worries over subprime loans have spread. Analysts say these debt instruments were developed primarily for sophisticated investors like hedge funds, which sometimes use these products to protect themselves. But the debt securities have also been peddled to pension funds and other institutions that may not completely understand them. The survey involved responses from 1,333 institutions in North America, including mutual funds, insurance companies, pension funds, banks, brokerage firms' proprietary trading desks and federal agencies, Greenwich said. These investors were polled about their trading in 15 kinds of debt instruments. Overall, debt-market trading volume among the participants increased by 10% in the period, to $25 trillion, from the previous year.