Hedge Fund Enters Asset Swap

  • 17 Dec 2001
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Pioneer Alternative Investment Management has entered an asset swap to hedge the underlying credit risk on a convertible equity option it purchased for one of its convertible arb funds. Oliver Owen, fund manager for Pioneer's EUR25 million (USD22 million) convertible arb fund in Dublin, said the fund entered an asset swap on South African Breweries to strip out most of the credit risk from the fund manager's purchase of the equity component of an SAB convertible bond.

In the asset swap Pioneer receives 250 basis points over LIBOR and pays the counterparty the coupon on the bond. Most of the credit risk is also transferred to the swap counterparty. The asset swap effectively reduces the EUR5 million position in SAB to EUR350,000, the price of the equity option. Owen said the trade lets the fund gear its exposure and all but eliminate its credit and interest-rate risk.

The fund also uses OTC instruments such as foreign exchange options, equity derivatives and credit default swaps. It aims to return 12-15% per annum with 8% volatility. It is currently in the capital-raising process and he expects it will manage several hundred million euros by next year. The fund's prime broker is Deutsche Bank, but Owen declined to name the counterparty for the asset swap.

  • 17 Dec 2001

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