WEST PALM BEACH, FL (HEDGECO.NET) – Hedge funds have seen declining returns this summer, and many managers are seeking for more ways to use their experiences and skills to profit from the markets.Since April 2004, the global equity markets have traded with narrowing volumes and volatility, making it harder for hedge funds to initiate new trading positions.
Some managers are exploring new ways to make money from the markets through a little known strategy described as �Capital Structure Arbitrage�. This strategy involves trading the debt of a firm against its equity. Such strategy could best be explained through a traditional arbitrage strategy when managers may buy company�s corporate bonds and then sell the company�s stock at the same time.
Because of many varieties of bonds and maturities, it is difficult for the market to price in these bonds that could be converted to equities in a consistent manner. Fund managers trading this strategy are able to take advantage of these market inefficiencies by buying one commodity and selling the other.
Derek Stewart, director of global alternative investments at Mellon Bank, said “Company capital structures are more complicated than they were historically and that is throwing up more opportunities.� Capital structure arbitrage is a growing area of activity and hedge fund managers who understand how to analyze the complex capital structure of companies are best positioned to profit from such opportunities.
This area of trading however, still needs to be fully explored according to Edgar Sullivan, managing director, absolute return strategies at General Motors Investment Management Corporation. Edgar made his remarks in a conference earlier in September. Many of the Capital structure arbitrage opportunities happen in emerging markets, particularly in Eastern Europe. An increasing number of hedge fund managers are turning to Eastern Europe, where markets are not as efficient as they are in advanced countries.
Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: Editor@hedgeco.net
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