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Alternative Market Briefing

Barclays reviews the case of out of favour converts

Tuesday, December 17, 2013

Beverly Chandler, Opalesque London:

The Strategic Consulting Team at Barclays Capital Solutions Group has researched the convertible (convert) hedge fund landscape in their latest paper. "Despite the relatively small AUM base of HF strategies focussed on converts, the team found the subject matter intriguing for two main reasons: While a number of HF strategies performed poorly in 2008 and suffered heavy redemptions, most appear to have recovered and are back in favour with investors (e.g., mortgages, structured credit) but this appears not to be the case for convert HFs. Despite the fact that, on average, convert HFs have produced some of the most compelling returns among key HF strategies since 2008, they have fared the worst in terms of net flows into the Strategy" the team writes.

Since flows generally track performance over time, this conspicuous inconsistency, the authors found this surprising, especially in the current return-seeking environment. Beyond that, Barclays finds the convert market itself has undergone significant changes since 2008, both on the supply side (e.g., market size, ownership, leverage, liquidity) and the demand side (e.g., convert HF AUM, number of players, strategy).

"In a number of ways, convert HFs today are very different from what they were pre-crisis. In this study, we take a closer look at these changes and their implications with an eye toward helping investors better asse......................

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