In late july, wells fargo & co. Analysts Natalie Cohen and Roy Eappen published a research note suggesting that hedge fund buyers are becoming bigger players in the $3.6 trillion U.S. municipalbond market. But as the New York-based researchers pointed out, there's no clear way to see what those firms are buying and why. That's because of aquirk in howthe U.S. Federal Reserve Board counts what it calls household investors. "The Federal Reserve (sadly) includes both nonprofit organizations and hedgefunds in the Household category" of bondholders, Cohen and Eappen wrote. Still, hedge funds appear to be going all in on obvious U.S. distressed plays like Puerto Rico and any issuance coming out of Illinois. Hector Negroni, co-founder, co- CEO and CIO at New York-based Fundamental Credit Opportunities, an $800 million municipal finance fund, says the opportunity set for hedge funds is much larger than distressed debt. Although people think municipal bonds are just for mom-and-pop investors, he explains, before the financial crisis proprietary trading desks at the U.S. bulge-bracket banks and even foreign banks were big players.
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