CDC Ixis Asset Management plans to launch by the end of June two convertible arbitrage funds that will use derivatives. Dahlia Marteau, head of alternative fund management in Paris, said the funds will use equity, interest-rate and credit derivatives. One fund is expected to be approximately EUR500 million (USD440 million), and the other, EUR100 million.
The asset manager is launching the funds now because the recent downturn in the equity markets has led investors to look for alternative sources of income, according to Marteau. Convertible arbitrage funds can earn positive returns in falling equity markets and also diversify investors' portfolios.
Convertible arbitrage takes advantage of undervalued options in convertible bonds. But in order to profit from buying a convertible bond and selling the stock, implied vol must rise on the convertible. In a hypothetical trade, said Marteau, CDC would buy a convertible bond linked to KPN and sell the stock. This would give it a market neutral position on KPN. It would then buy credit default protection and hedge the interest-rate risk on the bond by entering an interest-rate swap.
Marteau said the convertible arbitrage funds will have a target performance of the Euro Overnight Index Average (EONIA) plus 1-1.5% and a maximum volatility of 1.5% of the value of the fund. EONIA was at 4.78% Tuesday.
The asset manager has over EUR300 billion under management, approximately 1% of which is in alternative investments.
