Retriever writes
But isn’t the point that hedge funds tend to have fairly short time horizons, and that bonds close to redemption will be trading close to par – leading to limited scope for making money in the way you suggest? I’d have thought that what you suggest only works if you can hold the bonds for a long time – so it might work for life insurers even if it doesn’t work for hedge funds?
Not at all. See the chart above of International Airlines Group Nov-22 0.625%, maturing next year. As you can see, the price fell to 70 at the worst point of the crisis, then pulled back. It is now trading at 95, and if it matures at 100 in November next year, i.e. assuming it does’t default, the hedgies will have made a handsome profit.
Hedgies don’t even need to wait for maturity. They can simply keep buying into dips, and sell into rises to make a sure fire guaranteed profit. At least, if the PRA theory is true.