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The Alexandra Global Investment Fund has entered an asset swap on the back of a convertible bond it recently purchased. The manager bought USD5 million of three-year Hutchinson Whampoa bonds, exchangeable into shares of Vodafone Group. It then essentially stripped out the embedded equity option and sold the bond to a special purpose vehicle, said Mikhail Filimonov, managing partner at Alexandra Investment Management, the investment advisor for the fund in New York. It sold the bonds at a value such that they could be swapped into synthetic floaters paying LIBOR plus 165 basis points.

Lion Capital Group plans to launch a long/short equity hedge fund that will use over-the-counter derivatives. Markus Jordi-da Costa, managing partner in Zurich, said the fund will use calls, puts and basket options when it launches in February. It will typically use derivatives to short a stock or a basket of stocks. For example, if it thinks the share price of a sector of stocks is going to fall it will buy a put on a basket of stocks in that sector.

Lehman Brothers is pitching to clients basket equity option trades designed to profit from sectors expected to outperform and under perform the Standard & Poor's 500 when the index has bottomed out but the economy is not in recession. Paul Lieberman, v.p.-equity derivatives and quantitative research at Lehman in New York, said sectors including investment banks/brokerage houses, airlines, and networking technology stocks have since 1962 tended to perform well in the six months following non-recession related S&P 500 lows. Conversely, sectors such as gold and precious metals, and engineering and construction typically under perform under these conditions.

HSBC has hired seven equity derivatives sales professionals in the last two weeks: four in private banking and three covering institutional investors. HSBC now has seven sales professionals covering equity derivatives for private banking clients.

Montreal-based fixed-income manager Addenda Capital has hired Graeme Thom from Toronto-basedRoyal Bank of Canada Dominion Securities, the brokerage arm of RBC, to develop and manage what the firm believes is an innovative multi-strategy bond vehicle that will invest between 20-30% in over-the-counter and exchange-traded bond and currency derivatives.

The View From Fifty Thousand Feet

Banco Guipuzcoano has purchased a three-year basket call option quantoed into euros on the Nikkei 225 and the Dow Jones EURO STOXX to structure a deposit account for Spanish retail investors. The options return the increase of each of the indices above their levels when the option was purchased. Alfredo Urrutia, head of derivatives in San Sebastian, said the deposit account puts half the investor's money into a three-year guaranteed deposit which gives 50% participation in each of the indices and offers a 100% capital guarantee. The other half of the investor's capital is put in a deposit account for one year, which pays 6% interest, 140 basis points more than one-year Euribor when the trade was put on earlier this month. After a year the investor gets this half back. The bank loses money on the cash placed into the deposit account but makes it back, along with a profit, from the margin on the guaranteed portion of the deposit account.

This chart, provided by Citibank/Salomon Smith Barney Inc., tracks bid-ask prices for par credit facilities that trade in the secondary market. It also tracks facility amounts, ratings, pricing and maturities.

BB&T Asset Management has nearly completed a major shift out of long Treasury bonds, slashing its duration by 10-15% in the first two weeks of this month. The manager believes recent yield rallies don't offer enough reward for staying long-duration. However, the firm won't completely abandon long bonds, says Keith Karlawish, who manages $190 million in taxable fixed income, because inflation remains relatively contained and there are continuing Treasury buybacks.

Merganser Capital Management in Boston, which has historically been overweight the broker-dealer sector, has cut its holdings from 15-20% of the portfolio to 5%, selling $350 million worth of the bonds, which it views as too rich. The Morgan Stanley Dean Witter two-year medium term notes issued two weeks ago came at 80 basis points off the curve, compared with comparable finance sector or bank paper that is generally priced about 100-120 basis points off, notes Bob LeLacheur, who manages over $2.8 billion for the firm. He adds that five years ago MSDW paper would have traded 50-100 basis points cheaper to any bank. As the equity market began penalizing broker dealers with poor P/E ratios, they got rid of risk, and following recent mergers become market favorites.

Pitcairn Trust is in the process of executing a swap out of ABS and agencies and into investment-grade corporates on a credit-by-credit basis, to capture additional spread. Patrick Kennedy, portfolio manager for $200 million in taxable fixed-income, expects another strong year out of ABS and agencies, but believes he can pick up extra spread by swapping into corporates whose spreads he expects to tighten.