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Hedge Funds Dominate U.S. Convertible Market
Rising hedge fund leverage ratios can take credit for helping plug the holes in the leaking convertible bond market, according to Greenwich Associates. Convertibles have been in decline for the past year, with the long-market value of convertibles in the U.S. sinking 8% from a year ago and their European counterparts tumbling 20%. But there are signs of a possible comeback. While the results of our research do not indicate that the convertible bond market has grown over the past year, John Feng, a Greenwich consultant said in a statement, there are at least signs that it is stabilizing. Those signs, Feng says, include a sharp increase in leverage ratios from 2.4 in 2005 to 3.0 this year a finding that suggests hedge funds are seeing increased opportunities in convertible arbitrage. That is encouraging for the sector, at least in the U.S., where hedge funds make up a whopping 78% of Greenwichs research universe for conv arb. Although a number of factors influence trends in hedge fund leverage ratios, Greenwich consultant Jay Bennett said, the increase over the past 12 months should be viewed as an optimistic sign for convertible investors.