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Hedge Fund European Fixed-Income Trading Volume Doubles; Managers Cast Wider Net For Liquidity
( Greenwich Associates )
(January 16, 2007)

Tuesday, January 16, 2007 Greenwich, CT USA - Hedge fund trading volume in European fixed income doubled in 2006 as hedge fund managers sought to diversify their sources of financing and securities lending services in support of their growing businesses.

The two-fold increase in fixed-income trading volume among hedge funds active in Europe spanned all cash bond and derivatives products. In government bonds, emerging markets, and interest-rate derivatives, hedge fund trading volume tripled or more, while trading volumes in total credit derivatives and structured credit derivatives doubled.

These are just some of the findings of Greenwich Associates' 2006 European Fixed-Income Report. A new white paper, based on this annual research program, analyzes the growing presence of hedge funds in European fixed-income markets. In particular, the paper examines efforts on the part of hedge fund managers to diversify their sources of the financing and securities lending services needed to support their aggressive strategies.

Hedge Funds: Testing the Limits of Growth?
As hedge funds become more active and increase the size of their positions and trades, any indication that banks are even considering a change in terms on securities lending or financing transactions would cause serious concerns for managers. Several findings from Greenwich Associates' 2006 European Fixed-Income Investors Study suggest that hedge fund managers have received exactly such a signal.

"There is no debating that hedge funds receive top quality service from prime brokers and other financial service firms, and, thanks to the sell-side's infatuation with these lucrative clients, hedge funds in general have no shortage of sources for liquidity," says Greenwich Associates consultant Andrew Awad. "Even with banks fighting vigorously to win this business however, several developments over the past 12 months have injected a new element of reality into their relationships with hedge funds."

On a broad basis, banks watching the explosive growth of hedge fund trading volumes are becoming increasingly concerned about the concentration of several important risks: counterparty risk, credit default risk and their overall levels of hedge fund exposure. For brief periods over the past year - in particular during the emerging markets troubles in May and June 2006 - several large banks actually pulled back on the amount of liquidity they extended to hedge funds.

That moment passed quickly, and banks lost no time in returning to their aggressive courtship. "Nevertheless," says Greenwich Associates consultant Peter D'Amario, "the developments of the past year appear to have served as a reminder to some hedge fund managers that the favorable terms they receive from their banks and prime brokers might not last forever. As a result, hedge funds now seem to be seeking out relationships with new providers that they will be able to call upon when in need of funding and securities lending services."

The research reveals several data points that suggest hedge fund managers in Europe are increasing their focus on preserving access to liquidity. At a most basic level hedge funds appear to be seeking out alternative sources of liquidity away from their prime brokers. At the same time, hedge funds appear to be paying more attention to their ability to access financing when reviewing and selecting their prime brokers.

Peter D'Amario concludes: "Our research does not suggest that liquidity is drying up for hedge funds in Europe. Quite the contrary, most managers are besieged by banks hoping for a piece of this business. But our research does suggest that - in certain spots - liquidity has become more expensive or less abundant for brief periods. In response to these bumps, hedge funds appear to be taking preemptive measures to preserve critical resources."

For more information contact:
Joan Weber
+1 (203) 625 4354

Greenwich Associates is the leading international research-based consulting firm in institutional financial services. Greenwich's studies provide benefits to the buyers and sellers of financial services in the form of benchmark information on best practices and market intelligence on overall trends. Based in Greenwich, Connecticut, with additional offices in London, Toronto, and Tokyo, the firm offers over 100 research-based consulting programs to more than 250 global financial-services companies. Please contact us for further information or to arrange an interview with one of our consultants. You can visit our website,, for more information.



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