Hedge funds find their way to invest in municipal debt market

November 11
10:16 PM 2013

A number of hedge funds are betting and betting large on municipal debt, as it returns the use of aggressive tactics to the so-called humdrum market with a net worth of USD3.7 trillion.

Amongst the strategies being undertaken would be demands for high interest rates in return for financing local units as well as seeking to find profits on increasing volatility as against investors that have dominated this market. Another major area of concern is the deepening fiscal problems in many of the US cities and states.

According to brokerage firm HJ Sims & Co's director of credit analysis Richard Larkin, "Hedge funds are a new phenomenon in our market. And I don't think there is any good that come of it." The analyst has spent 38 years in the municipal bond market.

The hedge fund investments range from deeply discounted debt from Puerto Rico to the highly rated Stanford University bonds. In another instance, the 2011 bankruptcy petition of Jefferson County, AL may yield nearly 33% on the USD900 million of sewer debt purchased by hedge funds at a discount. This was confirmed by people familiar with the matter.

Many hedge fund managers say that their strategies would be able to benefit all municipal bond investors through more frequent trading, more transparency bond pricing and the increasing disclosure by government officials seeking to sell off debt.

Hedge funds, many of whom invest trillions of dollars on behalf of wealthy individuals, pension plans and college endowments, are entering the municipal debt market at a time when investors fear the increasing risk of default. Many hedge funds now own billions of dollars in distressed municipald debt which was virtually non-existent five years ago, according to analysts.

Having hedge funds as investors though may come at a far greater price, as many seek to turn a profit at the soonest possible time, forcing the municipality to undertake more obligations that it may be able to handle.

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