ETF Flows Boost Bond Strategy

Chidem Kurdas

As yield-seekers increasingly took refuge in junk bonds, money flowed to index funds in this asset class, in particular exchange-traded index funds. This has been a boon for hedge funds that look for arbitrage opportunities in credit markets.

High-yield ETFs have grown a lot in the past two years. This means that their purchases and sales have also grown to levels where they move the market significantly. What is more, these transactions typically follow a known pattern based on the funds’ mandate to track an index, allocating predictably across the market.

Knowing all this, hedgies buy when ETFs and index mutual funds have inflows and sell when ETFs and index mutual funds have outflows. It’s not a new strategy, but the growth of index investing has given it a boost.

High-yield bonds may not provide a good return these days but apparently this strategy does. Index funds make our life easier, says a hedge fund analyst.

Among the managers known to follow ETF and mutual fund flows: Symphony, a hedge and conventional fund manger with around $12 billion in assets. Acquired by municipal bond giant Nuveen in 2001, Symphony changed hands again in 2007, bought by private equity investors led by Madison Dearborn.

Nuveen continues to distribute funds managed by Symphony.

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