Market conditions are looking increasingly favourable for arbitrage strategies, according to the latest monthly survey of fund of hedge fund managers by Hedge Funds Review.
The managers' opinions showed expectations of growing performance among convertible arbitrage, merger arbitrage and capital structure arbitrage.
Philippe Bonnefoy, independent adviser on alternative investment strategies at Commerzbank Securities, said he allocated the highest proportion of his portfolio to risk arbitrage in the past month due to improving market conditions for the strategy.
The ACE Balanced Fund made its largest allocation to multi-strategy funds, followed by credit specialists and equity arbitrage, convertible bond arbitrage and fixed income arbitrage, according to Cedric van Rijckevorsel, manager of the fund.
Managers also predicted improving prospects for equity market neutral, fixed income, managed futures/CTAs, global macro, and global emerging market funds. Distressed debt and emerging market funds, excepting Latin America, were and will continue to be the strongest strategies, according to managers.
Managers also predicted no change in the European long/short and technology sectors with both remaining weak.
Only Japan long/short and emerging market Asia are areas where single strategy managers are expected by fund of fund managers to begin finding achieving their targets increasingly difficult, according to the survey.
However not all managers were negative about Asia and Japan. One said the alleviation of Sars ' a core driver of underperformance in the region ' could allow managers to capitalise on firm positions held in stocks that were negatively affected, yet whose underlying profits only suffered slightly.
In the past three years IAM has probably made more strategy allocation changes than in the previous 10, according to Andrew Gibson, an investment manager at the firm.
The hedge fund universe has become more specialised and economic conditions have changed creating a need for more strategy diversification, with increased allocation to fixed income arbitrage, convertible arbitrage, relative value and distressed debt, he said.
In the past two months, IAM has moved out of mortgage-backed securities entirely due to a large amount of refinancing that has made that market more susceptible to interest rate change.
'There were many arguments not to be involved in the mortgage market and it was not worth the extra due diligence,' said Gibson.
IAM has also begun to reduce fixed income arbitrage exposure and has added some macro and credit arbitrage players. It is diversifying away from fixed income, where rates have become very low, according to Gibson.
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