Hedge Funds Bearish On Junk Bonds

New York (HedgeCo.net) – The growth in ETFs and liquid alternatives are presenting hedge fund managers with what some see as their next great bearish trade. The target is the junk bond market. The idea is that due to the popularity of junk bond ETFs and liquid alternatives, there won’t be enough liquidity in the market when an exodus begins.

The reason these high-yield ETFs and liquid alternatives have become so popular is due to interest rates being so low for so long that income investors are seeking yield almost anywhere they can find it. With treasuries paying next to nothing unless you go out to 10-years or more, a high yield ETF yielding over 5% looks inviting.

The problem is that while the ETFs themselves are liquid, the debt instruments they hold may run in to liquidity problems. If investors panic and junk bonds start declining, the ETFs holding the debt instruments will decline as well and it could drive the funds sharply lower.

A recent article in the Wall Street Journal, pointed out that hedge funds are looking for different ways to profit from a drop in junk bonds. Apollo Global Management is raising money for a fund that will invest in credit-default swaps. Reef Road Capital Management has been shorting ETFs that hold junk bonds and buying put options on them as well.

Rick Pendergraft
Research Analyst
HedgeCoVest

This entry was posted in HedgeCo Networks Press Releases, HedgeCo News, HedgeCoVest News. Bookmark the permalink.

Leave a Reply