Too big to ignore? Hedge fund flows and bond yields

Abstract

This paper investigates the information content of aggregate hedge fund flow and its predictive power with respect to bond yields. Using a sample of 9,725 hedge funds from 1994 to 2012, we find that fund flow is negatively related to the changes in 10-year Treasury and Moody's Baa bond yields one month ahead. The relation is still pronounced after controlling for other determinants of yield changes, including the amount of arbitrage capital available in the economy, suggesting a non-trivial effect of flow-induced hedge fund trading on bond yields. Flow impact on corporate bonds is further amplified during periods of decreasing market liquidity, consistent with a fire-sale hypothesis. Hedge fund flow also predicts convergence between constant maturity swap rate and constant maturity Treasury rate, as well as between the TIPS and Treasury bond yields, suggesting that hedge funds exploit arbitrage opportunities in these fixed-income markets.

Fixed income mutual fund performance during and after a crisis: a Canadian case

“…The correlation coefficient is shown between the average monthly return, dollar fund flow, management fee, mutual fund age, government bond indexes, and the TSX index. The dollar fund flow forms a weak positive correlation with the 10Y and 3 M government bond indexes (0.001 vs. 0.006) and is deemed to be statistically significant, contrary to the findings of Kolokolova et al (2020). Although the coefficients are minuscule and point to no correlation, this result suggests that, as dollar fund flow increases for fixed income mutual funds, long-and short-term government yields also increase.…”

“…In the dataset, values associated with monthly return, total net assets, and management expense ratio (MER) account for a large quantity of extreme outliers. Therefore, following Kolokolova et al (2020), we winsorize the lower and upper 1% to reduce the influence of any extreme values. Summary statistics for the fixed income mutual fund and bond yields are provided in Table 1.…”

“…This may not seem like an important issue, but this selection bias may skew the data when scaled in a yearly format. Fund inflow represents an increase in position, meaning that an investor is buying more into the funds, and a fund outflow represents the opposite (Kolokolova et al 2020). The average dollar fund flow for the Canadian fixed income funds only is 112.50, implying that, on average, fixed income funds are increasing in size.…”

“…Previous studies focus on percentage fund flow (Cao et al 2008, Rakowski 2010, but this study uses the standard definition employed in the literature. Equation (1) denotes the change in total net assets minus appreciation (Del Guercio and Tkac 2008;Kolokolova et al 2020). Using this allows for a concise analysis of monthly net flow in Canadian fixed income funds.…”

Utility Indifference Valuation for Defaultable Corporate Bond with Credit Rating Migration

“…Especially after the financial crisis of 2008 and the European debt crisis of 2010, credit information has been more attractive to market participants. Investors demand trading strategies to hedge credit risk, and regulators are anxious to control credit risk contagion [4][5][6]. Credit risk refers not only to default risk [7][8][9], but also to credit rating migration risk [10][11][12], where the latter has received more and more attention.…”