A study by two Bank of Canada’s financial market experts found that hedge funds typically take opposing positions from those of insurers, pension funds and other market participants. — Reuters
OTTAWA: Hedge funds have helped boost liquidity in the C$1.06 trillion (US$800bil or RM3.62 trillion) Canadian government bond market in recent years, with the key exception of the market turmoil brought on by the Covid-19 pandemic in March 2020, according a research note from two Bank of Canada’s (BoC) financial market experts.
The study, based on Canada government bond trading data from October 2019 through December 2022, found that hedge funds typically take opposing positions from those of insurers, pension funds and other market participants, the research released Tuesday said.
But from March 9 to March 20, 2020 – when markets and businesses seized up from government lockdowns aimed at slowing the pandemic – hedge funds mirrored other market participants in selling the securities.
“These results help to advance Bank staff’s understanding of the asset management sector and of asset managers’ behaviour in periods of market turmoil,” BoC’s economists Jabir Sandhu and Rishi Vala wrote in the note.
“This shows that hedge funds can at times contribute to one-sided markets and amplify declines in market liquidity.”
While the data don’t offer enough evidence of the reasons triggering the hedge funds sales during the turmoil of March 2020, concerns around investors’ redemptions, increased margin calls or a desire to reduce leverage are all potential reasons, Sandhu and Vala said. — Bloomberg
