A $200 Million Hedge-Fund Trade in Your Bond ETF Is Normal Now

John Burbank, founder and chief investment officer of Passport Management LLC.

Photographer: Jacob Kepler/Bloomberg

Don’t be surprised if you see a huge chunk of cash simply evaporate one day from your exchange-traded bond fund. There’s a good chance it’s just a hedge fund cashing in on a bet.

An example of this can be found in BlackRock Inc.’s $5.1 billion long-term U.S. Treasuries ETF, which saw the greatest volume of withdrawals this year among similar funds. Among investors yanking cash was Passport Capital, the $4 billion hedge-fund firm run by John Burbank.

The firm sold its entire $217 million stake in the ETF in the period ended March 31, about three months after purchasing the shares, according to data compiled by Bloomberg.

On one hand, this is a remarkable amount of money, equal to about 4 percent of the fund at its current size. It’s also notable because ETFs have traditionally been marketed to individuals as a quick, easy way to invest in debt.

But that’s changing. These funds are increasingly being used by and advertised to big institutions, which are looking for the same efficiency as smaller investors at a time when it’s getting more difficult to execute big trades.

Larger bond buyers are finding it easier to dash in and out of positions electronically with ETFs, rather than bonds that are traded over-the-counter in telephone calls and e-mails.

Greenwich Study

Since 2008, trading volumes of the five-largest credit ETFs have grown 75-fold, according to a Greenwich Associates study released Monday. About 12 percent of institutions surveyed by the Connecticut-based research firm reported having traded ETFs in increments of more than $100 million, according to the report.

The study, which included 128 U.S.-based institutional investors interviewed between January and March, also found that many of these firms plan to increase their use of ETFs in coming years.

Some of the bigger hedge-fund firms, including Hutchin Hill Capital and Pine River Capital Management, have already been quite active in buying and selling large blocks of debt ETF shares. So have funds managed by BlackRock and Wells Fargo & Co., data compiled by Bloomberg show.

Debt-focused investment managers have been struggling to efficiently switch around their holdings as the global bond market balloons on the heels of unprecedented central bank stimulus.

Trading in general has gotten more difficult as big banks reduce their market-making role in the face of new regulations. Also, investors are finding themselves all piled into the same trades as a result of monetary stimulus, pushed to buy riskier assets at historically high prices for any yield at all.

So don’t assume that some behemoth ETF trade is signaling the end of the world. Yes, it could mean the market’s completely falling apart, but it also may just be a big hedge fund changing around its wagers.