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Capital Markets

Hedge funds become the US fixed-income market

According to a study by research and consulting firm Greenwich Associates, hedge funds generated nearly 30% of US fixed-income trading volume last year.

Hedge funds generate more than 55% of US trading volume in liquid or "flow" derivatives with investment-grade ratings, and more than 80% in high-yield derivatives; more than 85% of US trading volume in distressed debt, nearly 55% of US trading volume in emerging-market bonds; and more than 40% of US leveraged loan trading volume.

In the liquid markets, hedge funds have been similarly expanding their trading activity, according to the report. In US government bonds, hedge funds are now the second-largest source of trading volume after investment funds/advisers, generating 30% of market volume. They rank as the biggest source of trading volume in interest rate derivatives, in which they also account for 30% of total US trading volume. Hedge funds generate a quarter of US asset-backed securities trading volume, and 20% of volume in mortgage-backed securities.

"However, it is at the other end of the liquidity spectrum that hedge funds have become the biggest force. In structured credit, hedge funds generated nearly half the trading volume reported in the US over the past 12 months," says Greenwich Associates consultant Frank Feenstra. "The recent expansion of hedge fund positions and trading activity has been so rapid and consistent that it is now no exaggeration to say that, during the period 2006 to 2007, hedge funds were no longer just an important part of the market in some fixed-income products – they were the market," says the study.

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