WEST PALM BEACH, FL (HEDGECO.NET) – The drying up of Europe�s convertible bond issuance may spell some serious consequences for some specialist hedge funds. According to published reports, theEuropean new convertible bond issuance is currently at seven-year lows, this problem is driving some hedge funds specializing in these strategies out of business. Strategies mostly impacted by suchmatter include bond, equity and other bond derivative instruments.
The prevailing low market volatility has led to the problem of fewer opportunities for trading mispriced securities. A fund manager familiar with the situation said, “It is clear we have seen a severe correction in terms of deals, prices and people in the industry. Stock volatility is still going down and convertible arbitrage strategies may not make money next year� according to the source.
Widely followed volatility tracing barometers such as the German VDAX is currently at an 8 year low with a recent record of 14%. By contrast, the 2002 VDAX reached a peak of 60%. Colin Bennett, head of Equity Derivatives Research at Dresdner Kleinwort Wasserstein said, “Companies’ balance sheets are in a much healthier state, so they do not need to raise capital in the same amounts as they did only a couple of years ago.�
In other continents issuance is also low, however the level of issuance in Asia surpasses that of Europe. Rossitza Rossitza a convertible bonds analyst at HSBC explains that part of the reason is the level of accounting uncertainty is lower in Asia that in Europe. Industry analysts think that some hedge funds specializing in these strategies may not survive while waiting for new bond issuance to materialize. According to industry sources, six convertible bond managers folded their operations this past June, and some fund of hedge fund managers have drastically reduced their exposure to such investment assets.
Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: Editor@hedgeco.net
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