Bond managers fear hedges being undermined as liquidity dries up

The recent sell off in the bond market and growing liquidity issues have forced bond investors to use similar hedging techniques, undermining their effectiveness and causing concerns about how much downside protection funds really have.

Consensus trades, such as shorting duration or investing in core government bonds as a diversifier, have not paid off, managers said, with yields widening out. The proliferation of such trades across some of the UK's leading bond funds is also causing concerns as it means many managers could be impacted if one such trade backfires. Ian Winship (pictured), head of sterling bonds at BlackRock, said bond managers need to introduce more flexibility into their investment processes to prepare for the threat of increasing yields. "Everyone uses the same hedges, such as buying and selling ...