Increased investor desire for credit is prompting fund
managers to innovate to keep up with demand, according to
In a research report Wednesday, the Stamford, Connecticut-based
asset management consultant said demand for credit has
outstripped supply a phenomenon fueling rapid
innovation in the use of credit default swaps,
exchange-traded funds, and futures.
While corporate bond issuance has risen as a result of
investors reaching for higher returns than low-yielding
Treasuries, the sale of the debt is being scooped up by large
buy-and-hold investors. Thats left smaller firms
searching around for whats left, according to the
Given the reduced liquidity of corporate bonds and the
inability of many smaller investors to trade swaps, the ability
to execute credit-related strategies remains constrained,
said Kevin McPartland, Greenwich Associates head of
market structure and technology research, in a statement.
Pensions, endowments, and foundations plan to allocate
nearly $120 billion to fixed-income managers this year,
according to the report. In a survey of investment-grade
investors last year, 89 percent told Greenwich reduced
liquidity had at least somewhat negatively impacted their
trading ability, and 90 percent of high-yield investors said
the same about high-yield credit.
Buy-and-hold corporate bond investors need tools to
manage market and liquidity riska role that derivatives
play, Greenwich Associates said in the report.
Swaps and futures can ease the flow of credit around the
Some investors have begun using ETFs as either a substitute
or complement to derivatives, according to the report, which
noted the largest fixed-income ETFs now have assets approaching
$30 billion. Total return swaps used for a
short-term, tactical hedge are another tool
thats being increasingly adopted. Greenwich Associates
said the proportion of surveyed investors using total return
swaps jumped from 7 percent in 2015 to 17 percent in 2016.
The consultant also said that credit index futures are
gaining traction, particularly among investors who
do not wish to trade swaps.
Continued growth in these alternative structures would
greatly enhance the liquidity and opportunity within the credit
market by offering more of the multi-product liquidity and
hedging access afforded to other asset classes, Greenwich
Associates said in the report.
Alex Veroude, head of credit at New York-based asset manager
Insight Investment, notes that demand for credit has increased
despite the potential risks involved in high-yield debt.
Over the last two years, weve seen more entrants
in the market, weve seen the existing investors in the
market deploy more capital, and weve generally seen a
loosening of credit standards, Veroude said.