GLOBAL - Volatility and credit risk posed by bond holdings now outweigh inflation concerns, a survey by consultancy bfinance has found.

Nearly half of respondents to its 2011 Pension Fund Asset Allocation survey hedged less than 20% of assets against inflation, with the preferred tools for hedging being inflation-linked bonds and real estate.

Only 8% of investors chose to hedge as much as 80% of assets, with 29% opting for covering as much as 40% of assets and the remaining 15% of respondents choosing to hedge as much as 60% of exposure.

The majority of surveyed investors - 50 global pension funds with assets of $283bn (€196bn) - said they protected their bond portfolios against inflation by shortening their investment horizons, while 44% instead opted for floating-rate bonds.

Overall, investors saw volatility and credit risk as the two major concerns, with rising inflation and long-term rate increases only ranking third and fourth, respectively.

Mathias Neidert, deputy head of research at bfinance, warned that the demand for short-duration bonds would soon hit the market's limit.

"Managers currently launching short-duration, high-yield strategies will soon face the limit of the market's capacity," he said.

"The current size of the short-term US high-yield bond market is approximately $300bn."

He estimated an additional $400bn in outstanding institutional senior loans, as well as high-yield bonds worth €70bn within the euro-zone.

Neidert added: "Following the '3% Rule' - whereby, under normal circumstances, a strategy may hold up to 3% of the market it is investing in -managers are not likely to be able to raise much more than $10bn for such a strategy without being forced to alter their approach."