The two hedge fund strategies least likely to bounce back have been given a new lease of life, accor...
The two hedge fund strategies least likely to bounce back have been given a new lease of life, according to fund of fund managers.
Issuance data suggests convertible bonds may have turned the corner, although one set of redemptions in September could still hit strategy funds. Coronation Fund Managers notes activity in convertibles "picked up significantly" in June, with $4.6bn of deals in the US, including $2.07bn for Metlife, complimented by e437m from CapGemini and SFR430m from Lonza Group.
While credit concerns and equity volatility caused convertibles to start June on a "slightly weaker note", tightening credits in the third week of the month left many managers with gains by 30 June.
"The interesting trend is that terms on new issues are becoming more attractive and firms seem inclined to extend the maturities of their bonds," Coronation notes, adding that "overall, the convertible market is not very liquid." While conceding there may be further redemptions for convertibles, it does not anticipate this causing "undue pressure on valuations".
Another strategy enjoying increased deal flow in June was event driven, in particular mergers and acquisitions (M&A), where global deal volume at $254bn eclipsed the $209bn in May and the $138bn of June 2004.
Bob Doll, chief investment officer at Merrill Lynch Investment Managers (MLIM), said M&A had started 2005 "at a record pace" and, if it continues to grow robustly, "2005 could be the strongest M&A year in history," eclipsing even 2000.
"At the same time, dividend and share buy-back activity has been strong so far this year, and capital spending has improved recently from a lackluster pace," he adds.
Such predictions for convertible and M&A arbitrage would, if realised, be a turn-up for the books, reversing fortunes for the strategies seen as the two most moribund of the last 12 months.
For credit funds, Coronation noted the lack of volatility in the market and "steady spread tightening" contrasted with May and June, providing opportunities for the able.
"Credit picking-driven funds had an easier time since losses in previous months were recovered to some extent, and improving credit markets usually mean these funds have positive performance," the managers noted.
"Given that the anticipated news of severe trading losses at banks and hedge funds did not materialise, risk appetite started to creep back into the market. This was illustrated in new issuances, which were effortlessly absorbed by the market," Coronation says, citing Residential Capital's $4bn, and Goldman Sachs and HSBC as key issuers of new debt.
As US economic data gave mixed signals, the dollar's ascent slowed in June and global liquidity continued tightening, and Coronation noted the resulting flattening of the yield curve has meant "some carry trades remain vulnerable for the foreseeable future".
Renewed issuance of convertibles and tightening credits saw many convertible managers positive in June.
Practitioners foresee 2005 eclipsing 2000 in terms of M&A activity.
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