MarketWatch – Convertible securities can be bought at bargain prices, if a long-term investor can wait out the typical hedge fund holding period — three months — and pick through the selection managers are selling.
Hedge fund managers typically measure the value of securities on a short-term basis because they utilize options in their investment strategy. So sometimes wider price disparity and volatility is good for convertibles as managers reap the benefits of large spreads between bid and offers.
But it also can lead to inaccurate pricing and cause managers to take losses. That’s largely what happened last year when the convertible hedge fund market turned in the worst performance of any category: down 3% through December, according to CSFB/Tremont’s hedge fund database. Since the beginning of this year, however, convertibles have risen 3%, according to Morgan Stanley’s index that tracks prices.
And convertible managers who have survived the fallout from last year can pick up inventory from their fallen colleagues.
“A lot of hedge funds closed down,” says Tom Ray, who runs the convertible hedge fund firm Inflective Asset Management in Manhattan Beach, Calif. “They were leveraged too high and there were too many convertible arbitrage funds in the market which caused convertibles to be too aggressively priced. So once the tide turned, redemptions accelerated and there was selling pressure.”
