The Special Opportunities Fund, a hedge fund with USD119 million under management, is considering purchasing credit derivatives in the next three to six months because of the volatility decline in the convertible bonds market.
The fund has only sold credit derivatives to hedge credit exposure and isolate volatility, but TQ Advisors is now looking to increase exposure to credit derivatives by using them to go long credit, said Andy Anderson, director of credit research with Stamford-based TQ Advisors and the fund's portfolio manager. For example, the firm would be interested in buying an option on a credit derivatives index. This strategy has more leverage, requires less initial capital and is a more attractive hedging vehicle because you know your downside, he said.
A fall in the number of opportunities in convertible arbitrage goes hand in hand with improved credit, according to Anderson. TQ Advisors aims to shift resources to become a more credit oriented fund with a better return profile, he said. The firm has boosted its credit research team by hiring a new credit researcher and transferring another from its equity side, to keep innovation going.