Axis Capital Management plans to launch by the end of the month a European convertible arbitrage fund that will use derivatives. George Philips, chief investment officer in London, said the fund will buy investment grade convertible bonds and use derivatives to strip out the interest-rate, equity and credit risk. It then hopes to profit from the implied volatility on the convertible rising. Philips said the notional size of the transactions would typically be between USD5-50 million. He expects the fund to return 17.5% profit with 4%-4.5% volatility.
It is launching the fund now because it expects convertible bond issuance in Europe to increase over the next year, partly because of German companies issuing convertible bonds to unwind cross holdings, according to Philips. He added these convertible bonds will be especially interesting because they likely will be convertible into two or more stocks, depending on how many companies are involved in unwinding the cross holdings. The fund aims to raise USD100 million and is only available to institutional investors. All the derivatives trades will be executed viaDeutsche Bank, its prime broker. Axis hopes to add Goldman Sachs in the coming weeks.
The fund will be called the Northwest European convertible arbitrage fund because it aims to shift investors' risk return profile towards the 'northwest,' referring to the low end of the risk x-axis and the high end of the return y-axis.
Axis Capital Management has a total of USD150 million under management split between a global convertible arbitrage fund, a Japanese convertible arbitrage fund and a European managed account.
