Hedge funds, which have become increasingly important players throughout the fixed-income markets in the past couple of years, have been herding with especial zeal into emerging market debt. While hedge funds make up 15% of total fixed-income volumes and 25% of the trading volume in speculative-grade debt, for instance, they now make up more than 45% of trading volume in emerging markets, up from 30% last year.
The numbers have led Greenwich Associates to say that emerging markets have now reached the point at which they could not function efficiently without hedge fund involvement. “In many ways,” says Greenwich Associates consultant Peter D’Amario, hedge funds “have become the market.”
Hedge funds now dominate the world of emerging market debt as at no time since the emerging market crises of 1997/98, and they’re increasingly the employer of choice for emerging market professionals. “Think how many people from the sell side left to join a hedge fund in the past year,” says one emerging markets research executive. “Everybody and their mother is working for a hedge fund.”
And just as they’re the source of most of the best ideas in the market, to some degree they’re also replacing sell-side banks as the source of much of its liquidity as well.