“Credit market participants have been forced to make a trade-off between liquidity and specificity, and they’re choosing liquidity.”
Battle-ready investors on the prowl to hedge a looming reversal in the global debt cycle are embracing weapons familiar to Mom and Pop -- and falling out of love with complex derivatives.
For hedge funds and asset managers, the preferred way to shield credit risks is now the humble exchange-traded bond fund, according to a survey of 60 managers from Greenwich Associates published this week.
ETFs edged out credit-default swaps -- at the single-name and index level -- and were second only to corporate bonds themselves as a way for professionals to access fixed income.
Institutional investors are rubbing shoulders alongside the retail crowd in what has swelled to become a $634 billion market in the U.S. alone.
The principal advantage of ETFs over credit-default swaps is their ever-increasing liquidity, giving credit-default indexes a run for their money, even though trading in the latter has also boomed this year, at the expense of trading in cash bonds.
Sure, passive products are an imperfect hedge because they tend to be broader than swap indexes and single-name CDS, but respondents to the Greenwich survey can’t get enough of them.
“Credit market participants have been forced to make a trade-off between liquidity and specificity, and they’re choosing liquidity,” according to Ken Monahan, senior analyst on the market structure and technology team at Greenwich and author of the report.
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