FI Hedge Funds On top

Terry Flanagan

This year, fixed income hedge funds strategies are benefiting from the greater bond markets.

Fixed income hedge funds have returned 3.7 percent year to date, according to the TrimTabs/BarclayHedge hedge fund report—the best performing of all strategies. Fixed income hedge funds comprise $200 billion within the $1.8 trillion hedge fund industry.

As a group, fixed income hedge funds experienced an inflow of $14.6 billion in assets, also the heaviest inflow of all hedge fund strategies.

“Fixed income hedge fund strategies have done well because of dynamics in the general financial markets,” said Leon Mirochnik, research analyst at TrimTabs, “You have quantitative easing, and Operation Twist, so the fixed income market has seen a huge appreciation; the hedge fund market is echoing what happening now.”

TrimTabs is an independent investment research firm for institutional investors. In the combined report with alternative investment research provider, BarclayHedge, the firm produces monthly reports on trends, flows and performance data, derived from a monthly survey of hedge fund managers.

As is the case often with hedge funds, a cutting edge access to the marketplace has rewarded managers that were able to “lever up, call government intervention, and stay ahead of the markets,” Mirochnik said ,referring to Federal Reserve programs such as QE1 and QE2, driving up the prices of bonds.

Although the post 2008 environment for hedge funds have yielded a plethora of start-up opportunities, Mirochnik noted that the strong performance seen among fixed income hedge funds are of those with established reputations in the fixed income space.

The persistent bear market is also part of the fixed income success story; foreshadowing that fixed income’s strength is a result of fearful investor sentiment and the ‘new normal’ of lower returns and higher volatility in the equity markets.

“Hedge fund managers have zero interest in risk at present,” noted Mirochnik. “They are clinging to the safety of Treasuries and the greenback and stiff-arming stocks. Nevertheless, hedge fund investors are forking over fresh cash, and managers must put it to work.”

According to the report, bullish sentiment on the 10-year note rose from 15 percent to 23 percent from August to September, while bearish sentiment sank to 16 percent from 32 percent.

Apart from hedge funds, TrimTabs cited TIPS (treasury inflation protection securities) ETFs (exchange traded funds), have year-to-date returned 10.4 percent.

Even often criticized lowly muni ETFs are up 7 percent in 2011. Additionally, the yield on the 10-year Treasury recently plunged to 1.72 percent, the lowest level on record, from 3.75 percent in February, according to Mirochnik.

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