KBC Bank & Insurance has set up an alternative investment company and plans to launch a convertible arbitrage fund next month as its inaugural product.
Andy Preston, chief investment officer for convertible arbitrage at KBC Alternative Investment Management in London, said the fund will use credit, interest-rate and equity derivatives to isolate the embedded option in convertible bonds. For example it may buy a credit default swap to hedge the credit risk and enter a swap to hedge interest-rate risk. KBC will not launch the fund until next month because it is still raising capital. He added KBC Alternative Investment Management is free to use all market counterparties to get the best price and service for the fund. The prime broker for this fund is Goldman Sachs.
The fund will invest globally and use both investment grade and non-investment grade convertible bonds. Preston added, "we are sensitive to credit risk so will be major users of credit derivatives." The fund aims to return 15% a year with a standard deviation of 3%-5%. Over the last two years some convertible arbitrage funds have returned over 20% due to high issuance, stock volatility and declining interest rates. But Preston believes these rates are unsustainable and thinks these funds are subject to high levels of volatility. He predicts the capacity of the fund will be USD500 million. But said it expects to start trading with USD200-250 million and then reopen the fund after three to nine months. The fund will be seeded with over USD100 million from KBC, including USD50 million of proprietary capital.
KBC Alternative Investment Management has seven staff, including five front office personnel, all but one of which came from KBC Financial Products.
