No respite for convertible bond hedge funds
Tue Jun 21, 2005 8:33 AM BST
today.reuters.co.uk
By Pratima Desai
LONDON (Reuters) - Convertible bonds are cheap, but investors will avoid hedge funds that trade them, because the funds are caught in a spiral of being forced to sell investments to meet redemption calls, which pushes prices down further.
For weeks now, the industry has been talking about a possible comeback for the strategy, which uses computer models to work out whether the bond component is cheap relative to the equity component or vice versa.
News that Swiss bank Julius Baer plans to launch a convertible bond and high yield hedge fund in July has fuelled that talk.
But hedge funds, which dominate the convertible bond market, are sceptical, because volatility, which creates mispricing opportunities, is still low, and because the flow of money leaving the strategy after nearly 18 months of weak or negative returns has accelerated.
According to data provider Tremont Capital Management, assets in the strategy fell to around $30 billion in March from about $41.3 billion in 2004, and the number of managers slipped to 341 from 485.
Analysts said most of the drop in money under management was probably due to trading losses.
"Convertible arbitrage hedge funds are still facing redemptions, which means they will have to liquidate their positions," said Peng Tang, a partner at hedge fund Sigma Square. "That means lower prices, which triggers a chain reaction."
Tremont said investors withdrew $1.8 billion from hedge funds that trade the different components -- equity, bond and volatility -- of convertible bonds in the first quarter of 2005.
LOW-COST PRODUCERS
That number is expected to rise in the second quarter along with the number of hedge fund managers exiting the strategy.
"At the end of this month, we have second-quarter redemptions," said John Parkin, chief investment officer at Schroders fund of hedge fund business. |
