According to reports, as some “alternative” mutual funds are experiencing popularity, hedge funds are hoping to profit. These “alternative” funds and some bond exchange-traded funds are apparently facing an upswing among individual investors and especially retirees.
The reports indicate that financial advisers are using a new strategy, capitalizing as Federal Reserve benchmark interest rates remain near zero. Advisers are encouraging everyday investors to get into these funds in search of higher returns. Critics on Wall Street worry that junk bonds and bank loans that are held by these funds will be difficult to sell if the market takes a downward turn.
These concerns have been rising for a while now. Two investment firms, Apollo Global Management LLC and Oaktree Capital Management LP are preparing backup plans in case this happens.
Apollo has allegedly been attempting to raise money to use in a hedge fund. The purpose of this fund, according to the Wall Street Journal, is to pick up credit-default swaps, which are insurance-like contracts that benefit if the junk bonds fall.
The Wall Street Journal has stated that Apollo predicted: “ETFs and similar vehicles increase ease of access to the high yield market, leading to the potential for a quick ‘hot money’ exit.”
Reef Road Capital LLC is reported to have similar views, allegedly betting against exchange-traded funds that hold junk bonds. The company is apparently buying options that will pay were the value of these high-yield securities to fall.
These moves are being compared by some to resemble efforts made against the U.S. housing market ahead of the financial crisis. Back during that time, the market was full of homeowners deep in debt. These same homeowners had been encouraged by the low-interest-rate environment. During that time, hedge fund firms made billions by betting against the mortgage market. There is worry that the most current era of low interest rates has made risky junk bonds unreasonably attractive to investors.
The hedge funds are targeting a weak spot in the markets. “Liquid alternatives” which are emerging as a hot product in finance, are being powered by a promise to deliver a hedge-fund-style investment to the general public. They are more accessible to investors with a lower income because the associated fees are closer to those of a mutual-fund, though they more closely resemble hedge funds because it wagers both on and against markets.
Liquid-alternative funds, according to a Wall Street Journal report, manage a cumulative $446 billion, up from $83 billion at the start of 2009.
The foregoing information, which is all publicly available, is being provided by The White Law Group.
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