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Alternative Market Briefing

PAAMCO looks to Brazil to find returns outside of convertible arbitrage

Friday, May 10, 2013

By Beverly Chandler, Opalesque London:

Ronan Cosgrave is a director at $8.6bn US fund of hedge funds firm Pacific Alternative Asset Management Co, or PAAMCO for short. He is a sector specialist for convertible arbitrage, or convertible bond hedging, a sector that has considerably quietened since the excitements of the global financial crisis.

"It’s been a lean sector and out of favour recently" he says in an interview with Opalesque. These days, the sector’s name is something of a misnomer as there is little opportunity in the current markets to conduct the classic convertible arbitrage type trades in the US or Europe. "What we do now is more synergistic" he says. "We find opportunities in equity derivatives or Asian converts that are non linear or non 'standard'. We want to produce uncorrelated returns that are not adding to the same risk that everyone else is taking."

Convertible arbitrage underperforms when equities are flying but in a more negative market they should be included as a non-correlated part of a portfolio, offering a safe haven in choppy seas. However, convertible arbitrage didn’t do well in the biggest test of them all in 2008 – when in theory it should have – because everyone was highly leveraged. "When leverage lines got pulled you got forced selling which hit the returns" Cosgrave says.

Now, converts are dominated by long only......................

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