Investors were beginning to be skeptical of Hedge Fund performance, but volatility was enough to get them back in. Inflows this quarter have hit a 7-year high as they nearly hit $20 billion in Q1 2022. The biggest factors were inflation, the Fed’s response, and rising geopolitical tensions, which are all major sources of volatility recently. Macro strategy had the best performance for Q1 with a 9.1% return which is the highest its been in nearly 30 years. Multi-strategy and value were next up all with positive returns. The S&P 500 meanwhile dropped 5% over the same period. Corporate credit default and other short positions have been grabbed up by hedge funds recently to help counter volatility.
Finsum: This is a hedge fund's most crucial role in the financial world, they excel in these macro scenarios that are crippling standard markets.
The most recent week of April saw a mass exodus in the global bond market as investors were fleeing in concerns of economic growth. Based on a report from Refinitiv Lipper investors dropped $14.5 billion in bond investment, over ten times the losses from the previous week. Ten year treasury rose sharply to a near three year high, which sent bond prices falling. While inflation is rampant, March actually saw a little bit of relief in core prices as inflation was mainly driven by food and energy. One area of bond funds that hasn’t seen investors scared off is inflation protected funds which are on their seventh straight week of gains and inflows. More concerning than just the tightening cycle is the growth that could result in overtightening which could send the economy reeling.
Finsum: This could be the bottom of the bond market, investors should prepare for a little bit of a rally if supply chains free up.
It's never too early to begin thinking about tax-loss harvesting and there is a ripe situation in the bond market. The yield curve has been on the rise due to Fed tightening and inflation. Rising yields mean lower bond prices and ETF owners have taken a bath. Selling off those funds right now could give you a tax advantage later this year. However, investors should get out of the fixed income route altogether. Markets are beginning to show signs of a recession or straight volatility so replacing your bond ETF with another fixed-income ETF could help in the case of a recession. Or if bond prices begin to take off it's a good option to have some skin in the game.
Finsum: The wash rule makes harvesting losses in equity markets a bit difficult, but the plethora of bond funds and options gives investors better ability to harvest losses now.
The bond market has taken a beating and investment-grade debt has been anything but a safe haven for income investors. This has been one of the third-worst stretches in history as the YTD returns have been -10.5% which is only bested by the Lehman collapse in late 2008 where returns crept to -14.3% and Volcker’s days of battling high inflation and hiking rates. Investors are selling off investment-grade debt as the risk-free rates on Treasuries are climbing as the Fed’s tightening cycle is beginning. These rising yields are all corporate bond ETFs and driving returns down, but things could get worse as rates will only continue to rise and inflation is only beginning.
Finsum: Income investors need to look to active funds or abroad if they want relief in the bond market.
Acquisitions and launches are running hot in direct indexing and in an attempt to match rival Fidelity, Charles Schwab announced the launch of their new direct indexing products. The funds will be available starting on April 30th, but unlike Fidelity’s ultra-low initial investment of $5k, Schwab will require a $100,000 minimum. They want their direct index investors to have a better conceptualization of the market and think the minimum will attract this. The launch comes fresh off of tax season and will hopefully drive interest as tax is an advantage of DI. Schwab will concentrate on the tax advantages of their custom offerings as opposed to ESG or other flavors popular with these funds.
Finsum: The timing of this launch could put investors over the hump when it comes to taking advantage of tax-loss harvesting with their DI products.
BlackRock sent waves through the market announcing they were slashing fees from 0.04% to 0.03% for the largest bond fund in the world the iShares Core U.S. Aggregate Bond ETF (AGG). This wasn’t the only move they made as equity funds LRGF and INTF got their fees reduced as well. The fee battle is a prominent part of the game as lower expense ratios definitely garner more attention from investors. Previously BR had reduced fees on other fixed-income products as part of the escalating competition with Vanguard.
Finsum: FI income investors should keep an eye out, with prices and fees at lows, bond market ETFs could be in the ‘buy the dip’ territory’.
The bond market has given investors pause, and the international bond market especially so. While continuing Covid-19, international war, and rising rates may scare investors, international bonds still add enough diversification to justify their place in the portfolio. Investors are more worried about inflation/interest rates now than Ukraine and Russia, and that risk is heightened domestically. As the Fed hikes rates, yields will rise and hurt domestic bond and equity portfolios. The Euro area has significantly less interest and inflation risk in the near term. Additionally, the deglobalization of covid is slowly going away, and as markets open up that will only improve the position of international bonds.
Finsum: ETFs with large exposure are best in international markets because tensions surrounding global issues are heightened right now.
Not all REITs are created equally, and many have been pumping out dividends and will come to a screeching halt as the Fed begins to hike interest rates. However, three REITs are in a good position to show dividend resilience to the interest rate risk. The First is Medical Properties Trust which is a healthcare REIT that has three developing investments to create flows for dividends. VICI Properties is up next which is acquiring MGM Growth Properties and has a very low debt to EBITDA ratio which will help in securing dividend payouts. Finally, a long-term strategy is the 1st Street Office which has a consistently high dividend and shares are tied to its NAV.
Finsum: Rate hikes are slow to affect real estate compared to other assets, but aggressive hikes could move quicker.
The muni market has seen sky-rocketing volatility the last ten days with the highest point since the onset of the pandemic. That volatility has hurt many investors as yields rose by over 11 basis points sending bond prices tumbling. Triggering this decline in muni bond prices was Fed Chair Powell’s hawkish turn which included tapering asset purchases and raising rates. This loss is positioning munis for their worst quarter in almost 30 years. Some muni bond issuers are pausing or flat out canceling their development in the wake of a flat out crisis.
Finsum: This could be a quarter for muni bonds which have a close pass through to the Feds target interest rate and are therefore more sensitive.
A small but substantial change may be shaking the bond ETF infrastructure to its core. The New York State Department Financial services is allowing insurers to label bond ETFs as individual bonds rather than as equity risk. Companies have issued lots of new debt setting records as record low interest rates have made it appealing. This regulation could change the way the Fed and other regulators interact with bond markets, and could lead to the sort of efforts that saved the bond market in 2020. These will allow more bond products and increase inflows, but for insurers bond ETFs have more complications than a traditional single fixed income security and could provide difficulties in the future.
Finsum: Small changes to regulator practices like this can lead to massive swings in credit creation, keep an eye on bond ETFs.
More...
Most fixed income ETFs used to be linked to passive tracking products in the bond market, that is until more recently. Rules Adopted by the US SEC have steered many investors to active fixed income by making it easier to launch new active ETFs. Active funds are attractive for ETF producers because they draw higher fees (about .2 percent) than active funds. This has led to an explosion in active fixed income. Active bond fund creation is growing at nearly double the rate of the rest of the ETF market, and investors are ready as well as 2021 saw a record pace of inflows. One big factor in shifting more investors into active fixed income is aging global demographics which are still searching for yield and income.
Finsum: The world’s aging population is creating a safe asset shortage and pushing bond prices higher.
The Fed hiked rates at the latest FOMC meeting but they were partially forced to with just about every measure of inflation hitting 30-year highs. However, more importantly they project that the federal funds rate will hit 2.75% by the end of 2023. This may have been the first hike in years but it will be one of eleven if they want to hit that mark. The bond market is pessimistic as they not only are projecting less hikes, but slower growth as well. The yield curve is indicating inflation will be under control but it might be costly. Typically this means that the Fed won’t mean to hike as frequently as they are indicating. There has been a lot of action in the TIPS market and it is indicating they expect inflation to average just shy of 2.8% in the next decade.
Finsum: Markets are most likely right in this scenario and that fewer rate hikes will get inflation under control; hopefully the economy can take the hit.
February was a bad month for fixed income ETFs which saw $32.2 billion in outflows. This marks the third straight month in a row of outflows. However, fixed income wasn’t the only category suffering in February; many traditional funds like money markets and stock/mixed asset funds saw outflows as well. This is an overall bearish sentiment that is creeping across the market, and signals that investors are worried about future rate hikes for the Fed. However, alternative funds continue to be on a win streak as they had their strongest inflows in over a year and have 11 consecutive months of inflows.
Finsum: There is a stronger correlation with stocks and bonds than there was thirty years ago and many investors are turning away from bond funds in the face of volatility.
2021 was a comeback year for active fixed Exchange Traded Funds. Driving this home was a huge set of inflows as they saw a tenth of inflows globally, many of these came from the US. That trend isn’t stopping as nearly 80% of investors are searching to expand that position in 2022. Many investors see active funds having an edge with global turmoil increasing, as Russia-Ukraine escalates, and there are many macro risks domestically. Additionally, investors are clamoring to buy more ESG ETFs in 2022 as this trend shows no signs of falling off.
Finsum: Markets were messy and pretty hard to predict in the aughts, but active management seems to have a leg up in picking tech growth as well as fixed income winners.