Bond Funds Face Competition

Chidem Kurdas

Fixed income was one of the two hedge fund categories investors favored in March, according to BarclayHedge’s asset inflow data. But bond hedge funds are not the only vehicles investors use to get debt exposure.  PIMCO, the giant asset manager led by Bill Gross, is among those offering a variety of fixed income strategies similar to those used by hedgies.  Competition also comes from emerging markets managers that invest in debt.

Fixed income products include actively-managed exchange traded funds. There are now more actively managed fixed income ETFs, says PIMCO senior vice president Natalie Zahradnik. But fixed income is still a small part of total ETF assets.

The other favored hedge fund sector in March was emerging markets. Emerging market debt got significant capital in 2010.  There’s been a cooling down of investor interest but EM debt is still attractive, says Kevin Daly, portfolio manager at Aberdeen Asset Management.

Investors can hire either EM or fixed income managers for this purpose, which requires two skill sets, namely knowing EM and understanding credit risk and yield curves.

There is one obvious danger. Inflows to EM debt are partly driven by the Federal Reserve’s quantitative easing policy and if US Treasury yields rise, that could be bad for this investment area, Mr. Daly said.  He and Ms. Zahradnik spoke at a conference.

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