Bond Fund Managers Bemoan ‘Grind’
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
For the managers of bond hedge funds, the word that comes up most frequently in recent conversation is “grind.” The performance of the sector – the Hedgefund.net index of 122 funds is up 4.99% this year – has been respectable, especially given the well documented woes in strategies like convertible arbitrage and commodities trading. But, as one manager of $2 billion in New York put it, “I have to work twice as hard as normal and take some risk to earn slightly above certificate of deposit returns.”
Last year, the index was up 9.21%.
Fixed-income arbitrage hedge-fund managers, who use highly quantitative computer models to determine pricing inefficiencies in various bonds, have had lackluster returns because of a wide drop in volatility in capital markets. While there are numerous reasons for this, the most commonly agreed upon is that no clear consensus has emerged among bond managers as to the direction of the American econ omy. In that the past six months, managers have seen data pointing to both a rapid expansion and rapid slowdown.
With no clear bias among bond managers, bond prices have stayed in a narrow range, erasing the pricing inefficiencies that active bond traders can take advantage of. Moreover, hedge fund managers, who can be more active traders than their Wall Street dealer or mutual fund counterparts, have had little opportunity to profit from even small swings in price.
That said, one fund-of-funds manager, Robert Watson, who has approximately $1 billion in fixed-income under management – out of more than $2.1 billion in total – said, “I think the sector is maturing in a lot of ways. We don’t have the scandals and huge swings of performance that we have traditionally gotten during lulls in volatility.”
Mr. Watson predicted the sector would probably continue to see net inflows of new capital this year since most of the new money coming into funds is longer-term institutional capital, which seeks less performance in return for steadier long-term returns. An example of this type of investor would be an insurance company, who would seek a manager who could earn 3% on their money over 10 years, based on the amount they expect to pay out to meet claims as policies come due.
