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Money managers under the microscope

Sungard sees bright spot in convertible arb

June 12, 2009

Convertible arbitrage is the hedge fund trade of the moment, with top-ranking returns of 12.58 percent so far this year, but there could be more to come.

rtxd7bdThe strategy, in which managers usually buy a convertible bond and short the underlying stock, is proving particularly profitable because the bonds are rebounding from the battering they took last year. The strategy lost 31.59 percent, the second-worst performing strategy, in 2008 as funds scrambled to sell their positions in what had become a crowded trade.

Such is the scale of the rebound in convertible bonds now that simply buying the convertible, without shorting the underlying stock, is proving very profitable.

Paul Compton, head of product management at software group Sungard’s alternatives business, thinks the outlook is positive.

“In 2008, valuations in the market were so depressed, not just due to credit spreads but also prime brokers withdrawing leverage. Investors got seriously cold feet and redeemed. More than half the convertibles universe was owned by convertible arbitrage funds and the market couldn’t really absorb that,” he said.

“My gut feeling is there’s more to come, now that the market is starting to behave a bit more normally. It could be the stand-out performer of 2009 because of the depressed state of valuations in December, although if there’s a stunning recovery in the stock market it will probably underperform.

“What is really needed is to lock in investors and not face redemptions. We’ve seen new funds launch and distressed credit funds getting into convertible arbitrage.”


The comment by Sungard are not very informative. We already know that CB funds have been hit the most lat year, and that they rebounded a lot this year.
To say that, they could be the stand-out gainer of 2009 is also obvious. More than twenty CB funds are up by more than 30% this year, and a dozen have already recouped their losses of last year, so the CB arbitrag strategy is already the top performer of 2009, only Energy equity funds (with a big net long bias) or Emerging Markets funds could keep the pace of gains of CB arbitrage funds (but CB funds have a lower downside volatility and low correlation to emerging markets or commodities)

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