Hedge Fund Investors Losing Appetite For Convertible Arbitrage Strategies

by Phillip Morton, Investors Offshore.com

20 April 2005

TARA Capital, the European hedge fund advisory firm has released the results of its latest Hedge Fund Strategy Barometer, which has highlighted the accelerating shift by investors away from Convertible Arbitrage strategies and towards the increasingly popular Global Macro strategies.

The survey of institutions with a combined $74 billion allocated to hedge funds is intended to show how asset allocations move across the primary hedge fund strategies.

“The results from our latest research shows that investors in hedge funds continue to shun one of the traditionally most popular hedge fund strategies, Convertible Arbitrage while there is a big swing back towards fundamentally based Global Macro managers," commented John Lowry, CEO and founder of TARA Capital.

According to the survey, not one respondent indicated they were willing to increase their allocations to Convertible Arbitrage while 89% of respondents are planning to decrease their investments in the strategy. This represents the biggest negative score ever recorded by any strategy since the launch of the HFSB one and a half years ago.

“These results would appear to suggest that the whole viability for the convertible strategy is in serious doubt," observed Mr Lowry, although he did not rule out the possibility of a recovery, noting the strategy may be near a "historic low."

Big winners in the relative value sphere this quarter were Fixed Income Strategies, which experienced a sharp rise in popularity.

Multi strategy, traditionally one of the most popular of the stategy groups, continues its rise in popularity with 67% of respondents planning an increase. By contrast, the popularity of distressed strategies continues to fall, while demand for merger arbitrage funds is on the rise.

Interest in Global Long-Short funds appears to be waning, with TARA noting that interest levels have halved. By contrast, US Long-Short equity is an area of growing interest although a significant minority also plans to decrease allocations.

However, European and Emerging markets Long-Short funds continue to see strong investor support.

Meanwhile, Managed Futures/CTA strategies are continuing to increase in popularity, with 33% of those surveyed planning an increase. This quarter’s results also show very strong interest in Global Macro discretionary managers with 63% of respondents planning an increase to the sector as investors expect an increase in market turbulence.

TARA concluded that the latest barometer confirms the view that many investors are "losing faith" in certain strategies and managers and that many are now placing more emphasis in quantitative analysis to select managers.

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