Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

People are clearly worried about bond-market liquidity, and it's transforming the way debt traders invest, especially with so much economic uncertainty.

A good illustration can be seen at Pine River Capital Management, the hedge-fund firm known for its big profits on mortgage debt after the financial crisis. The $13 billion asset manager has been reorganizing a bit, closing down some funds and directing more cash to others, in large part because of recent changes in debt-market structure.

One of its notable initiatives is to cut fees for investors who are willing to lock up their money for longer periods, particularly in markets that have become less-predictably active, such as corporate and structured credit.

There's been "a one-way move toward markets becoming less liquid," the firm's CEO Brian Taylor wrote in a letter on Monday. As a result, "We view it as entirely reasonable for us to reduce fees for those investors who are willing to commit longer-lock capital to our investment ideas."

The bottom line for Pine River is that it can perform better without the threat of immediate investor withdrawals hanging over its head. The firm, based in Minnetonka, Minn., isn't alone in seeing more opportunity in owning assets for a longer haul rather than trying to time sentiment.

Over the past few years, there's been a wave of soul searching among credit managers about how they can perform better than passive indexed strategies. One answer is to get smaller. Peter Kraus, CEO of AllianceBernstein Holding, said on Tuesday that active investment managers might need to shrink their assets by as much as 30 percent to restore their ability to beat benchmarks. Another response is to move away from fickle market mood swings, and the main way to do that is to buy to own rather than trade.

Unimpressive Returns
Credit hedge funds haven't been reliably outperforming broader corporate-debt indexes
Sources: HFR, Bank of America Merrill Lynch index data

This presents something of a reinforcing cycle: the more once-fast traders slow down and focus more on longer-term investments, the less predictable trading becomes in more esoteric securities, allowing distortions and mispricings to persist longer than perhaps they once did.

The bad news is that this cycle exacerbates near-term volatility and makes it even more difficult to predict the direction of less-active markets from week to week. The good news is that it probably makes these markets safer in the long term.

Concentrated Bets
A growing amount of trade is focused on the most-active corporate bonds
Source: Finra

The more investors are forced back to a more traditional form of investing, the more they'll actually look at specific companies and lending terms to determine whether they'll be able to repay their obligations. That's discipline and moves investors away from simply trying to move more quickly than everyone else.

Credit money managers increasingly understand the importance of commitment right now. It remains to be seen whether a mass of investors do, too. A break on fees just might help.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net