In the United States, outright equity-oriented hedge fund investors made up 13% of all investors in the space, while dedicated outright convertible funds accounted for 11% of the market and outright fixed-income investors made up the remaining 2%. Overall, hedge fund investors accounted for 74% of all respondents to the Greenwich Associates annual survey this year.
The average institutional investor in US convertible securities held $1.6 billion in long market value convertible assets in 2004, up from $1.2 billion in 2003. Greenwich attributed the growth in part to increases in leverage levels among hedge fund investors, as investors increased their average leverage ratios to 2.8 in 2004 from 2.1 in 2003.
“Investors in US convertibles now have a smaller percentage of assets in high-yielding securities, and they are using more credit default swaps,” says Greenwich Associates consultant John Feng. “In general, their portfolios seems healthier in terms of credit quality and valuation, and this is giving them the confidence to ratchet up leverage ratios although to levels still below those of 2002.”
Greenwich points out, however, that convertible portfolios of hedge investors and outright investors are not dissimilar in composition. The portfolios of investors in US convertibles overall are split between 54% investment grade and 46% below-investment grade. Outright investors have split their US convertible portfolios equally between high-grade and below investment grade, while hedge funds are holding 56% investment grade and 44% below investment grade. Both types of investors had almost 10% of US convertible assets in distressed securities in 2004.
Across the pond, the percentage of European convertible investors identifying themselves as hedge funds fell to 64% from 70% last year. Simultaneously, dedicated convertible funds grew to one-third of the market from less than a quarter in 2003. Outright fixed-income and equity-orientated funds made up just 2% and 1% of the market respectively in 2004.
In contrast to the US market, a two-year decline in average leverage ratios on the part of investors in Europe has helped bring on a slight drop in the long market value of European convertible assets under institutional management, Greenwich found. Average leverage ratios hit 4.6 in 2002, before falling to 3.5 in 2003 and dipping to 2.6 this year. Thus, the average long market value of European convertible assets in the portfolios of institutions investing in the asset class fell from $1.5 billion to $1.3 billion from 2003 to 2004.
“In the European convertible market, outright funds have gained relative importance as many hedge funds de-leveraged their portfolios; even so, hedge funds still account for 70% of the long market value in European convertibles,” saidFeng .