Thu, Apr 26, 2018
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   |   
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. Investing - Sequoia takes Facebook stake as shares slide in data controversy, $1.4b hedge fund sees intact fundamentals for Facebook, Jim Cramer reveals some 'suggested hedge fund trades' amid the Trump tariffs[more]

    Sequoia takes Facebook stake as shares slide in data controversy From Bloomberg.com: The $4.2 billion Sequoia Fund bought a small position in Facebook Inc. as the stock slid late in the first quarter, investment manager Ruane, Cunniff & Goldfarb told clients. "The recent controversy enab

  2. Activist Investors - Blue Sky-owned Wild Breads faces uncertain future[more]

    From AFR.com: A Blue Sky private equity investment in artisan-style baker Wild Breads enjoyed multiple valuation upgrades despite losing millions and breaching its lending covenants, accounts lodged with the regulator last week show. Wild Breads lost $2.4 million in 2017, but Blue Sky ascribed a hig

  3. Opalesque Exclusive: Barnegat to close hedge fund to outside investors on weak opportunities[more]

    Komfie Manalo, Opalesque Asia: Bob Treue's Barnegat Fund Management said it is closing its $666m fixed income relative value hedge fund to outside investors. "The negative side to gains in Fixed Income Arbitrage is that unless we find new opportunit

  4. Investing - Hedge fund makes a big bet on malls, British hedge fund manager Odey short UK government bonds on QE bet[more]

    Hedge fund makes a big bet on malls From Barrons.com: The dominant narrative on American shopping malls is that they're dead. Crushed by Amazon.com, many brick-and-mortar retail stores are destined for bankruptcy. And where is the most retail, clustered all together? Malls. From a

  5. Performance - Hedge funds suffer first back-to-back loss in two years, Netflix performance burns hedge fund short sellers, Macro hedge fund up 14.5% in first quarter sees dollar falling, Renaissance Technologies rebounds across hedge funds in March[more]

    Hedge funds suffer first back-to-back loss in two years From Bloomberg.com: Hedge Fund returns sank for a second straight month in March, the first back-to-back loss since the first two months of 2016, as trade wars, tech-sector woes and a Fed rate hike dragged down the S&P 500 from its