If you don’t know which way you want to go in this market, join the crowd.
Rather than commit to specific bullish or bearish debt wagers, investors are piling into hedge funds that seek to profit regardless of whether values go up or down. They poured $18.3 billion into so-called relative-value debt funds in the three months ended June 30, more than any other of the main hedge fund strategies during the period, according to Hedge Fund Research Inc.
The surge in demand shows investors don’t expect this year’s surprise bond rally to last, even though economists are ratcheting down their forecasts for just how much rates can increase by the end of the year.
“You’re seeing people come into the space as a way to insulate themselves from the adverse impact they expect rising interest rates to have,” Kenneth Heinz, HFR’s president, said in a telephone interview.
Investors funneled $29.5 billion into relative-value credit funds in the first six months of the year, bringing their total invested assets to $742.6 billion globally, HFR data show. That’s up from $459.4 billion in 2007.
The debt hedge funds are attracting cash even though their performance has lagged behind a broad index of corporate debt this year. They’ve returned 4.76 percent in the first six months of the year, compared with 5.4 percent on the Bank of America Merrill Lynch Global Corporate & High Yield Index.
The concern is that as the Federal Reserve withdraws its easy-money policies, it will not only send government debt yields higher but also put an end to what Fed Chair Janet Yellen called “reach for yield” behavior, which is propping up the riskiest securities.
Of course, bonds are in the middle of a banner year and no one wants to miss out on returns in the meantime, either. Yields on 10-year Treasuries have dropped to 2.45 percent from 3 percent at year-end and U.S. government debt has returned 3.5 percent in 2014.
No wonder investors are punting on making a call on this market, and putting their money in funds that are supposed to gain regardless of what happens.