Latest mutual fund frenzy? Interest-rate hedges

BlackRock Inc., the world’s largest asset manager, and Blackstone Group LP’s GSO Capital Partners LP are forming mutual funds to invest in loans as the London interbank offered rate rises to the highest level since August.

The firms have joined Goldman Sachs Group Inc. in announcing funds investing in leveraged loans pegged to short- term interest rates. Investors poured more than $2.5 billion into bank-loan mutual funds in March and the first three weeks of April, more than triple the amount for March and April last year, according to Lipper FMI data.

The Federal Reserve will likely raise its target rate for overnight loans between banks to 0.75 percent by the end of this year, up from 0.25 percent, according to the median estimate of 67 analysts surveyed by Bloomberg. The S&P/LSTA U.S. Leveraged Loan 100 Index has returned 5.68 percent this year, building on last year’s record 52 percent as lending continues to open up.

New money “will provide financing, which will help” mergers and acquisitions, said Tom Ewald, a New York-based money manager who runs the Invesco Floating Rate Fund at Invesco Ltd., which has about $11 billion of leveraged loans under management. “That is a positive for all markets and the economy.”

Leveraged loans total $91.6 billion this year, more than four times the amount underwritten in the same period of 2009, according to data compiled by Bloomberg. The interest charge on leveraged loans is typically tied to Libor and as rates rise, the overall coupon increases. Three-month Libor rose to 0.344 percent today, the highest since Aug. 28, and up from a low of 0.249 percent on Feb. 4, according to Bloomberg data.

“This is one asset class that should perform well when short-term rates start to rise,” said Jeff Bakalar, co-head of the senior loan group at ING Investment Management. “It is one of a few natural hedges available to retail investors.”

GSO is marketing a floating-rate fund, the firm’s first product for individual investors, in which 80 percent of its managed assets are senior loans rated below investment grade, according a prospectus filed with the Securities and Exchange Commission on March 8.

Heather Lucania, a Blackstone spokeswoman, declined to comment.

BlackRock’s fund will most likely invest 80 percent of its assets in a mix of senior secured floating-rate loans and debt, second lien or other subordinated or unsecured floating-rate loans and fixed-rate loans, or debt in which the fund has entered into a derivatives contract to convert them into floating-rate payments, according to an April 14 regulatory filing. Goldman Sachs Asset Management LP has also filed a prospectus to be the investment adviser on a new loan mutual fund.

Lauren Trengrove, a BlackRock spokeswoman, and Melissa Daly, of Goldman Sachs, declined to comment.

New funds will “bring normal liquidity back to the market,” said ING’s Bakalar, whose group has more than $10 billion of loans under management, with about 25 percent of that in mutual funds.

That will create demand for new loans from issuers that are strategic or private-equity driven, he said. “We’ll likely see more LBO and more M&A activity take place as a result.”