US fixed income trading volume increased 15% from 2008 to 2009, despite a significant decline in hedge fund trading activity, according to the results of Greenwich Associates’ 2009 North American Fixed Income Investors Study.
The increase in overall trading volume was driven by a surge in the trading of ‘rates products’, including interest rate swaps and mortgage-backed security (MBS) pass-throughs. With year-to-year trading volume of most credit and securitised products either flat or lower over the period, rates products grew to over 80% of total US volume in 2008-2009 from 75% the prior year.
Hedge Fund Decline
A 40% decline in hedge fund trading volume resulted in a dramatic reduction in hedge funds’ overall presence in the US market. “In 2007-2008, hedge funds generated roughly 20% of total US trading volume in fixed income,” said Greenwich Associates consultant Woody Canaday. “In 2008-2009 that share fell to 12%.”
Of course, hedge funds continue to play a much larger role in markets for certain individual fixed income products. Hedge funds still make up more than 90% of trading volume in distressed debt, almost 60% in high yield credit derivatives and between 55% and 60% in leveraged loans and investment-grade credit derivatives.
Hedge Funds React to Crisis
The results of Greenwich Associates’ 2009 US Fixed Income Investors Study reveal that hedge funds have acted more forcefully than other types of institutions to manage counterparty risk and otherwise adjust their trading practices in response to the credit market crisis. Hedge funds are more likely than other types of institutions to say they have cut back on the total number of dealers they use for fixed income trading, shifted trading volume to dealers with the least counterparty risk and reduced the concentration of their trading business held by any single dealer.
“Perhaps the fact that hedge funds have taken these steps explains why only 12% of hedge fund managers say counterparty risk remains a significant concern, compared to 18% of institutions overall,” said Greenwich Associates consultant Tim Sangston. “But it is interesting to note that hedge funds register less concern than other types of institutions about a series of additional risks including systemic risk and credit/default risk.”
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