Bloomberg | Loan Funds Lure Investors Adding Risk in Search for Yield

Individual investors are putting more money into bank-loan funds, taking added risk in a search for higher yields and a hedge against inflation as the Federal Reserve vows to keep interest rates at near-record lows.

U.S. floating-rate funds in April had the biggest inflows in 11 months, according to preliminary data from EPFR Global, a Cambridge, Massachusetts-based research firm. Investors poured $729 million into the funds, the most since $2 billion last May. The funds buy speculative-grade loans, a type of floating-rate debt that ranks senior to bonds and is used to finance buyouts.

“Where else can you get 4 percent to 5 percent with zero duration? Few places, as far as I know,” said Christopher Remington, institutional money manager for Boston-based Eaton Vance Corp. (EV), which oversees about $24.7 billion in floating-rate loans for retail and institutional investors. Duration is a measure of interest-rate sensitivity. Most fixed-income investments fall in value as interest rates rise.

The Fed has pushed investors into riskier corporate credit by suppressing long-term rates on safer Treasuries under a $400 billion bond-buying program known as Operation Twist. To aid the economic recovery, the central bank has also kept its target interest rate within a record-low range of zero to 0.25 percent since December 2008.

The underlying loans returned 5.57 percent this year through May 4, compared with 3.08 percent through the same period of 2011, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index. The funds that buy them aren’t immune to losses….

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