Hedge funds play an important part of the overall liquidity in the debt capital markets, and have proved their worth in the recent landmark debt sale by Portugal.
Hedge funds tend to get low allocations in bond deals as they are seen as short-term, opportunistic investors. But in Portugal’s €2.5 billion 2017 bond sale, hedge funds were allocated 25 per cent of the deal. Asset managers, who tend to be longer-term investors, received 60 per cent of the debt. Traditionally, bond syndicates allocate only a small amount of a new bond issue to hedge funds because borrowers prefer stable, long-term investors buying the debt, and hedge funds are notorious “flippers”, selling the debt as soon as they can turn a profit.
Hedge funds had an important part to play in Portugal’s recent bond sale and helped the country gain access to the international debt markets after an absence of two years. Hedge funds were allocated more in the case of this Portuguese bond auction because they represented a sizeable proportion of the orders. Without hedge fund interest, Portugal would have struggled to borrow €2.5 billion from the international market. The Portuguese Ministry of Finance decided on the allocations.
Portugal is now looking at the lowest yields since August 2010, and with further progress in the economy will be rewarded with still much lower yields. This is because access to the international debt market is giving Portugal access to an even larger investor base that can vie for Portugal’s debt and potentially drive yields down. So, while hedge funds are not expected to be “long-term” holders of this sovereign debt, they play an intrinsic part in opening up the international markets once again to fiscally-stressed debt sale and breaking the reliance on domestic bank and fund investors.
© Wall Street Journal
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