Hedge funds bring more benefits than risks to bond market, says Italy’s debt chief

By Harry Robertson

BRUSSELS (Reuters) – Hedge funds are becoming increasingly active in Europe’s bond markets and, so far, they have brought with them more benefits than risks, Italy’s debt chief Davide Iacovoni said on Wednesday.

Hedge funds have become dominant players in the euro zone sovereign bond market. They account for over half of trading volumes on leading electronic platform Tradeweb last year and play a major role in regular government debt sales, Reuters reported in March.

But that has also raised questions about the risks they pose, as hedge funds, unlike the banks governments appoint as primary dealers, have no obligation to trade governments’ bonds in good times and bad.

“So far I think we get more benefits than risks,” Iacovoni, who is tasked with overseeing Italy’s borrowing, told an Association for Financial Markets in Europe conference in Brussels.

“This is something that we have to cope with – trying to balance risks and benefits.”

Hedge funds play an even bigger role in the Italian market. Reuters reporting shows they account for two thirds of Italy’s trading volumes on Tradeweb.

“We’ve been learning over time that you cannot just categorise hedge funds in a single entity,” said Iacovoni, noting these investors use a variety of strategies.

“So certainly, when it comes to the big ones, you need to know them, and you need to understand their strategies,” he said.

Olivier Pujal, senior advisor to the chief financial officer at the European Stability Mechanism, said hedge funds provided more trading volumes, which made the market more efficient.

But he also told attendees at the conference there were risks in the rising dominance of short-term investors.

“Hedge funds have no commitments, no incentives to stay in the market,” he said. “In the case of market turmoil, they are first to pull out when the going gets tough, increasing volatility as they de-leverage their position or exit the market.”