Lonely stronghold in besieged markets

Mon Sep 29, 2008




Fixed-income arbitrage, one of this year's best performing strategies, faces a fresh onslaught as credit markets seize up

By Pete Gallo

Fixed-income markets thrown into disarray by the government's recent takeover of Freddie Mac, Fannie Mae and the American International Group (not to mention the demise of Lehman Brothers) are posing serious challenges to fixed-income hedge funds, whose steady performance has, until recently, provided investors a haven from this year's tough markets.

At least one fixed-income heavyweight, John Meriwether's JWM Partners, has talked about winding down on big losses (his Relative Value Opportunity II fund gave up 26% through August), while earlier volatility took down Drake Global Opportunities, a fixed-income macro fund.

As a group, however, fixed-income funds entered September's maelstrom on strong footing. That's because exploding volatility gave a lift to relative value trading strategies, which seek to identify small price differences between similar securities and make highly leveraged bets that...

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