By ALISTAIR BARR
U.S. Treasury bonds, often a top choice for risk-averse investors, are attracting more interest from hedge funds, according to a study released Wednesday by consulting firm Greenwich Associates.
Hedge-fund trading volume in U.S. government bonds surged in the past year. In 2009, hedge funds generated about 3% of trading in this market. This year, that share jumped to roughly 20%, Greenwich Associates said.
The move may be driven by two trends. Heightened sovereign-debt concerns may be creating more trading opportunities in the Treasury market. Hedge funds also may be responding to demands on the $1.8 trillion industry by institutional investors.
"Hedge funds over the past 12 months have been refocusing their attention onto more liquid products," Greenwich Associates consultant Tim Sangston said. "This change in approach reflects both shifts in investment strategies and the impact of liquidity demands on the institutions that supply a growing share of hedge-fund capital."
The Treasury-bond market is the most obvious example of this, but the trend can also be seen in the market for agency securities, which are backed by mortgage-finance giants Fannie Mae and Freddie Mac.
Hedge funds still make up a small part of the agency market, but their trading volume in these securities jumped by more than 60% from 2009 to 2010, Greenwich Associates said.
Hedge funds were hit hard by a wave of redemption requests triggered by the financial crisis in 2008. Many funds froze withdrawals, locking up investors' money for months.
Now, investors are pushing to be allowed to withdraw money more easily in times of market stress. To offer this, funds may have to keep more securities that can be sold quickly. Treasurys and agencies are among the most liquid securities.
Write to Alistair Barr at alistair.barr@marketwatch.com
From The Wall Street Journal published on AUGUST 13, 2010