Hedge funds in Asia plan to step up their convertible arbitrage activity in light of a flood of expected convertible bonds issues in the coming months, according to hedge fund managers.
"This is a tempting market to issue converts," said an analyst at JPMorgan in Hong Kong, adding that with a positive credit outlook, low interest-rates and surging equity markets, non-Japan Asia will likely double or triple the issues of convertibles from last year, possibly reaching USD7 billion or more. "If the convertibles are valued at an attractive level, then we'll definitely be more involved," said George Long, managing director of Long Investment Management in Hong Kong, which has USD120 million under management.
Wharton Investment, with USD220 million under management in Hong Kong, is also looking to increase its activities. "We'll be focusing on Taiwan and Korea," noted Vanessa Gibson, managing director of Wharton Investment in Hong Kong, adding, "we'll be increasing this part of our book."
In a typical convertible arbitrage play the fund purchases the convertible bond and strips out the equity option and enters an asset swap. Additionally, if the fund doesn't want to take views on credit they will also purchase a credit-default swap on the underlying name.
