Tue, Sep 23, 2014
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Repeat of 2008 convertible bonds sell-off unlikely says RWC Partners

Wednesday, September 14, 2011
Opalesque Industry Update - David Basile, fund manager of the RWC Global Convertibles Fund, which lost 3% so far this year against stumbling equity markets, believes that although the environment is now very uncertain, there will not be a repeat of the sell-off in convertible bonds seen in 2008 – when the asset class behaved inconsistently.

The $200bn convertible-bond market had lost 36% by November 2008 reported the WSJ then, a bit more than the stock market. But the average convertible-bond hedge fund lost about 50% in that time, including a 35% plunge in October. Buying and selling convertible bonds is a bread-and-butter trade for many hedge funds, said the paper, and the market's decline hit some of the biggest ones, including Highbridge, Citadel and Jabre.

The HFRI Fixed Income-Convertible Arbitrage Index was down 2.39% (est.) in August 2011 and -2.62% YTD, after returning 3.73% in the last 12 months.

“The balance of convertible market participants in 2008 was skewed towards hedge funds using leverage to make a profit via volatility arbitrage versus long-only outright funds which invest based on fundamentals,” explains David Basile in an email. “The reduced availability of leverage and increased funding costs both negatively affected convertible arbitrage funds. These hedge funds became forced sellers of convertible bonds as positions became too expensive to hold, and they were required to deleverage. This was the key reason for the asset class becoming distressed in 2008.”

Long-only funds now the dominant players
But now leverage within the asset class is vastly reduced, he goes on to say. As indeed the most recent data indicates that the balance between hedge funds and traditional long-only participation has swung by 20% such that long-only funds are now the dominant players in the convertibles market.

And while the short-selling ban adversely affected the valuations of convertible bonds, currently, new short-selling restrictions will have a limited impact on convertible bond markets and valuations: “A number of European countries have introduced restrictions that are effective for limited periods and the UK, Germany and the Netherlands have announced that they are not introducing such restrictions for now. Additionally the more dominant role of long-only accounts combined with the lower leverage levels of arbitrageurs will constrain any negative impact on convertible bonds in the event that short-selling restrictions are expanded.”

RWC has compared equity market performance over the key stress period of September 2008 to the recent moves in August when the decline in equity markets was of a similar magnitude and found that the market composition is now much more balanced between long-only accounts and hedge funds, with long-only accounts being the dominant of the two. “This means that the asset class is structurally stable and is in a far better position to withstand pressure than it was in 2008,” Basile concludes.


It was reported on Monday that RWC Partners, an independent investment firm based in London, was to launch a hedge fund for Peter Allwright and Stuart Frost to replicate the strategy of the Macro Trading Crescendo fund they previously managed at Threadneedle. And RWC’ Head of Absolute Return Bond Strategies, Peter Allwright, said in May that investors should be far more concerned about the effects of the “re-profiling” of Greek debt than the inflation numbers.
B. Gravrand

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. SEC charges 19 investment firms and one trader for breach of Rule 105[more]

    Benedicte Gravrand, Opalesque Geneva: The Securities and Exchange Commission (SEC) started a push to enhance the enforcement of Rule 105 of Regulation M last year to uncover hedge funds and private equity firms that have illegally participated in an offering of a stock after short selling it duri

  2. Fund managers, bullish on Europe, anticipate monetary policy separation of Fed and ECB[more]

    Komfie Manalo, Opalesque Asia: At least 202 fund managers with $556bn of assets under management said that while the European Central Bank (ECB) has eased its monetary policy that sent sentiments towards Europe to pick up, the Fed is expected to hike its rate in the spring of 2015. Investor

  3. Institutions - North Carolina workers call on state pension to dump up to $6bn in hedge funds, UK pension fund criticizes hedge fund fees[more]

    North Carolina workers call on state pension to dump up to $6bn in hedge funds From Forbes.com: The State Employees Association of North Carolina this afternoon called on state Treasurer Janet Cowell to withdraw all investments in hedge funds, which appear to amount to approximately $6 b

  4. News Briefs - Limited partners of investment managers may be subject to self-employment taxes, Just one week left until NYC's Rocktoberfest[more]

    Limited partners of investment managers may be subject to self-employment taxes On September 5, 2014, the Internal Revenue Service (“IRS”) issued Chief Counsel Advice 201436049, concluding that members of an investment manager were subject to self-employment taxes with respect to their e

  5. Institutions - Adviser's faith in hedge funds unshaken by CalPERS' move Advisers weigh in on CalPERS’ decision, Gina Raimondo sees no reason to follow California’s lead, exit hedge funds, Danish pension funds step up 'alternative investments'[more]

    Adviser's faith in hedge funds unshaken by CalPERS' move From WSJ.com: Financial advisers who use hedge funds in their clients' portfolios say they aren't rethinking that approach after a huge California pension fund announced plans to exit the hedge-fund market. The decision by the Cali