Hedge Fund Reader : Investment in Municipal Bonds, spells profit for hedge funds

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July 20, 2005

Investment in Municipal Bonds, spells profit for hedge funds

Municipal bonds have caught the fancy of Hedge Funds lately. Perceived Tax-free gains through investment in municipal bonds seem to be the main pulling factor, considering the more or less flat returns in the first half. This strategy is being dubbed by some as ‘munitrade arbitrage’. Investment in municipal bonds has fetched a return of more than 3% till now and in the whole of last year, the return was over 8%. There have been reports of hedge funds investing in longer term (20 years) municipal bonds which have given returns of about 4.1%. The strategy is to set up trust structures which will convert the new bond into tax-free short-term municipal tender option bonds. These will then be marketed to investors. President of hedge fund firm Anchor Capital Group, Narayan Prasad who is a veteran trader in municipal bonds said the trade is indeed an attractive one! Hedgefundsworld.com reports:

“Reports are that hedge funds are buying longer-term municipal bonds, which have recently sported yields of about 4.1 percent for 20-year notes. The funds will then set up Trust structures to convert the new bond into tax-free short-term municipal tender option bonds, which will then be marketed to investors.”

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July 20, 2005 in Emerging Markets | Permalink