Andrew Pipa, head of convertible bond trading at Morgan Stanley in New York, is setting up a convertible bond hedge fund that will include trading convertible arbitrage strategies. Morgan Stanley is backing Pipa in the venture, according to an official, although it could not be determined whether the fund will operate as an internal hedge fund, or whether the firm would provide seed capital. Pipa declined comment.
While Pipa is well regarded as a trader, the convertible arbitrage market is becoming increasingly saturated and hence it is more difficult to generate returns with the strategy, noted one observer. In the past few years convertible arbitrage, in which portfolio managers typically purchase undervalued convertible bonds and short the same issuer's stock, has produced one of the highest risk-adjusted returns of any hedge fund strategy and this has encouraged more players to enter the market, he noted.
As convertibles become increasingly over arbitraged and it becomes more difficult to find suitable bonds, managers are taking more directional positions, noted one strategist. In this strategy a manager who is negative on a credit will increase the percentage of stock it shorts, or short less shares and purchase more bonds on a more bullish view.
Gay Ebers-Franckowiak, managing director at Morgan Stanley, is expected to take over Pipa's duties, said the official. She did not respond to messages.