Sun, Apr 20, 2014
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Convertibles trading volume contracts despite recovery in asset value, smaller hedge fund presence - Greenwich Associates

Wednesday, October 27, 2010
Opalesque Industry Update - A recovery in the valuations of convertible securities held in the portfolios of institutional investors in the United States and Europe has not translated into a pick-up in trading volumes, which continued to decline from 2009 to 2010.

The recovery in global equity markets and the tightening of credit spreads around the world last year helped restore the valuations of institutional convertible securities holdings by some 20% in the United States and Europe. Despite the growth in AUM, the results of Greenwich Associates’ 2010 Convertibles Investors Study reveal that average institutional trading volumes in convertible securities declined by 10% from 2009 to 2010 in the United States and by 25-30% in Europe.

Relatively low levels of new issuance contributed to the trading slowdown in 2009-2010. In addition, many of the trades that were executed in 2008-2009 involved opportunistic “cross over” buyers — many of them outright funds — looking to take advantage of what they saw as historically attractive valuations on convertibles. The restoration of valuations to more “normalized” levels from 2009 to 2010 brought an end to this wave.

A Diminished Presence for Hedge Funds
Specifically for the U.S. market, this trend also meant that outright investors now account for a significantly larger portion of the convertible asset holdings, having replaced investment capital from some hedge funds that have either de-levered or left the convertible space altogether. In 2007, outright or long only investors made up only about a quarter of the total number of active convertibles investors tracked by Greenwich Associates in the United States; today, they make up 45%.

Attrition among dedicated “convertible arbitrage” shops and other hedge funds helped shrink the presence of hedge investors in the U.S. market. Also contributing to the reduced influence of hedge funds in both the United States and Europe was a sharp decline in leverage ratios. After peaking in 2007 at 3.4:1, leverage ratios for U.S. hedge funds declined to 2.9 in 2008 and dropped to 2.4 in 2009. Over the past 12 months they have crept back up — but only to 2.7. Hedge fund leverage levels peaked in 2008 in Europe, also at 3.4, but dropped to 2.4 in 2009 and fell again to 2.2 in 2010.

“With the tepid pace of new convertible issues and richer valuations of existing securities, hedge funds are not seeing opportunities attractive enough to warrant the types of leverage levels seen in 2007 and 2008,” says Greenwich Associates consultant John Feng.

Institutions’ plans for future asset allocation suggest that new investment capital may flow into the convertibles market in the coming year — and that U.S. hedge funds might soon begin rebuilding their presence in the market to some extent. In the United States, 38% of institutions active in convertibles — including 43% of hedge funds — expect to increase the proportion of their total capital devoted to the product, with only 6% planning a reduction. Forty-five percent of European institutions active in convertibles expect to increase the proportion of their total capital devoted to the market, with only 3% planning a reduction. Whether these expectations translate into reality will depend to a large extent on the availability of new issues.

Greenwich Leaders: U.S. and European Convertibles
Deutsche Bank and Barclays Capital have built a significant lead over competing brokers in European convertible bond trading, with Deutsche Bank amassing an estimated market share of 17.3%, followed by Barclays Capital at just over 16%. In the more fragmented U.S. convertible market, the following firms all have earned market shares of at least 10% of institutional convertible trading volume: Bank of America Merrill Lynch, Credit Suisse, J.P. Morgan, Goldman Sachs, Deutsche Bank, and Citi.

Investors in European convertibles give the highest quality ratings to Deutsche Bank’s overall capabilities while Bank of America Merrill Lynch earned the recognition from investors for U.S. convertibles.

Source

kb

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Banner
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing
  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Opalesque Exclusive: Classic Auto Funds Limited (CAF) launches several car investing funds[more]

    Bailey McCann, Opalesque New York: A new trend in alternative alternatives is emerging - car appreciation funds. Classic Auto Funds Limited (CAF) is the first to market with several funds that make super elite luxury cars into real asset investments. As a result of growing overseas demand couple

  2. CTAs could face new challenges in a rising rates environment[more]

    Bailey McCann, Opalesque New York: CTAs have taken a beating performance wise lately, and asset flows reports show that investors aren't sticking around to see how the movie ends. Now, a new white paper from Roy Niederhoffer and Coen Weddepohl notes that as interest rates start to tick back u

  3. Investing – Big hedge funds bought Puerto Rico's junk bonds, Fidelity explores new trading venue amid flash trade concerns, Crisis-era Greek bonds reward early buyers with big effective returns, Cargill unit discloses stake in Freddie preferred[more]

    Big hedge funds bought Puerto Rico's junk bonds From Reuters.com: Several large hedge funds doubled down on Puerto Rico in last month's giant bond sale despite the U.S. territory's financial struggles, the Wall Street Journal reported, citing confidential documents reviewed by the newspa

  4. Opalesque Exclusive: Hedge fund replicators evolve[more]

    Bailey McCann, Opalesque New York: Hedge fund replicators as a group of products tend to get a bad rap from hedge fund managers who suggest that the best a replicator can offer is dynamic beta capture. A

  5. Commodities – Popular value fund manager David Iben bets on Russia, gold,[more]

    From Reuters.com: With large bets on Russia and North American gold miners, one of the best performing stock pickers in the wake of the 2008 financial crisis is back with a new fund that reflects his deep aversion to following the crowd. In the Kopernik Global All-Cap Fund, David Iben is follo