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Morgan Stanley Trader Plans Arbitrage Hedge Fund

A top bond trader at Morgan Stanley is moving to set up a fixed-income hedge fund that will employ convertible arbitrage strategies.

A top bond trader at Morgan Stanley is moving to set up a fixed-income hedge fund that will employ convertible arbitrage strategies. Andrew Pipa, head of convertible bond trading at Morgan Stanley in New York, is setting up a convertible bond hedge fund, according to sister publication Derivatives Week. Morgan Stanley is providing Pipa with seed capital for the venture, according to an official, although it could not be determined whether the fund will operate as an internal hedge fund or whether it will be run outside the firm. Pipa declined comment.

While Pipa is well regarded as a trader, convertible arbitrage is becoming increasingly saturated and it is more difficult to generate returns with the strategy, notes 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 adds.

As convertibles become increasingly over-picked and it becomes more difficult to find bonds, managers are taking more directional positions, says one strategist. In this strategy, a manager who is negative on a credit will increase the percentage of stock it shorts, or if they are bullish on a name they will short fewer shares and purchase more bonds.

Gay Ebers-Franckowiak, managing director at Morgan Stanley, is expected to take over Pipa's duties, according to the official. She did not return calls.

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