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Institutional Appetite for Fixed Income Hedge Funds.

by Graeme Terry

  • 10 Oct 2011
  • HF

Preqin currently tracks 371 institutional investors that list fixed income arbitrage as a strategy preference. Of these investors, 57% are based in North America, 31% in Europe and 12% in Asia and Rest of World. Fixed income arbitrage hedge funds tend to be more popular amongst larger institutional investors as typically these funds produce limited returns and they also have a high level of risk involved. This is particularly relevant in the current volatile economic climate as fixed income arbitrage hedge funds could be open to dramatic losses, particularly in the face of a potential ‘double dip’ market crash.

Fixed income arbitrage hedge funds are most popular amongst funds of hedge funds with just under 29% of investors indicating this as a strategy preference. Other investor groups that are likely to consider fixed income hedge funds include asset managers with 15% of investors indicating this as a preference, endowment plans (13%), superannuation schemes (13%) and public pension funds (12%).

Despite the reservations that many investors have about fixed income hedge funds, the prevailing economic climate and fluctuation of global interest rates has encouraged less-risk adverse investors with a preference for high volatilities to remain interested in the sector. Currently 14.9% of all investors on the Preqin database list fixed income as a strategy preference which is an almost 2% increase from the 13.1% who indicated this at the end of 2010.

Overall fixed income arbitrage hedge funds remain relatively niche as many investors avoid these due to the limited returns and considerable risks associated with the strategy. However, despite the risks involved, fixed income arbitrage hedge funds have performed better than most other hedge fund strategies in 2011 and there are still investors who view this strategy as an effective way of adding diversification to their hedge fund portfolios.

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