Convertibles Many convertible arbitrage hedge fund managers are waiting for a shock to the market t...
Many convertible arbitrage hedge fund managers are waiting for a shock to the market to 'shake out' those managers who cannot invest successfully in a US convertible market 75% held by hedge funds, according to Sandre Manzke.
The founder of Tremont Capital Management and industry luminary says although convertible arbitrage has been flat to down in 2004, and although Tremont has pulled out of the strategy as adviser to Matrix Securities' Conservative Approach Strategy Fund of hedge funds, "the strategy has still produced double digit returns over the longer term."
Convertible bond arbitrage lost 8.1% in 1994, according to CSFB/Tremont Advisors, she notes, but since then has made 14% (1997), 16% (1999), then 25%, 14% and 4% in the subsequent three years.
"It still has an unbelievable track record," she notes, "but it is a strategy with some limitations."
"Some convertible managers are also trading convertible markets in the UK but when there is a shake out we believe there will be another opportunity for convertibles."
"In the 1990s, any companies wanting to raise money went through convertibles," Manzke explains, "because no-one would raise money through equities."
"We have cut back positions (in convertible bond arbitrage) dramatically because spreads are so narrow and there is no volatility, and managers we speak to think for the next year it is a zero rate of return," she says.
UK Equity Long/Short
The UK equity market finished a volatile and fractious October around 1% higher despite a decidedly mixed market background. More evidence emerged last month that economic activity is starting to slow. In the UK, both industrial production and consumer price inflation fell for the third straight month, while private sector employment figures were also weak.
Overall values of UK equities have been reasonably compressed. Paul Findley, manager of Threadneedle's closed Crescendo UK Fund explains that the difference between the highest priced sector and the lowest priced sector is smaller than normal, creating a favourable environment for both long and short bets.
Findley says it is not just the sectors that are seeing level prices but also the stocks. He uses the analogy of walking into a wine store and every bottle is priced £5.99 - when that is the situation eventually the French Bordeaux will sell out and the sweet German wines will be left on the shelf.
Opportunities for emerging markets investors have traditionally been perceived as greater in Asia and Latin America than the economic minnows of Eastern Europe.
With the legacy of Communism and the fallout from the Russian default in 1998 still fresh, the region's economies are small, even by emerging standards.
But the long anticipated opening up of European emerging markets, the most keenly awaited product of EU enlargement in May, ensured the sector has been watched by investors and fund managers more than at any time since the Russian crisis.
Performance in the region has been good. Hungary is up 63% year to date (YTD), Czech Republic 48% and Poland 30%. However, Juli Stein, fund manager at London-based Griffin Capital Management's Emerging Europe Value Fund, an equity long/short with E120m assets and 25% returns YTD, says the region has been similarly attractive for the eight years he has operated there.
He guesses the recent attentions of the mainstream media, rather than a sudden improvement in performance, made the difference.
Alex Belkin, Moscow-based fund manager for Marathon Capital Management's Avalande fund, a small European equity long/short emerging markets operation with $3.2m under management posting returns of 28.5% YTD, says many people doubted accession would bring opportunities.
"As the entry to the EU came close, I heard people saying everything had already been discounted, it was not news, it had been expected for a long time and bond spreads already reflected the change. There was a general lack of enthusiasm," he says.
"In the eyes of many people conversion was complete. But that was not true." Belkin says the relatively small number of players in the market was advantageous for his fund.
What people had not factored in, Belkin argues, were the structural reforms being pursued in Central and Eastern Europe. "The development of the entire banking infrastructure and the mortgage lending market was somehow overlooked, along with the impact these can have on the bottom-line of European banks," he says.
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