U.S. convertibles held by U.S. institutional investors including hedge funds dropped nearly 20% to $240 billion over the 12 months ended June 30, while the long-market value of European convertibles held by European institutions rose 10% to €160 billion ($187 billion), according to data released today by Greenwich Associates.
Demand declined for U.S. convertibles in the year because of lackluster inflows to hedge funds with convertibles exposure and a corresponding decrease in leverage ratios, Greenwich researchers noted. "Disturbances" in the credit bond market, especially the downgrading of U.S. automakers' bonds, drove up spreads on corporate bonds and convertibles.
The depressed U.S. convertibles market has led hedge fund managers to alter their strategies. ""Many hedge funds that invest in convertibles are diversifying their investment strategies," Greenwich consultant John Feng said in the report.
Researchers at Greenwich noted that investors traded $290 billion in U.S. convertible bonds during the year in addition to $60 billion in trades of convertible preferreds and mandatories. The Greenwich data also found that hedge funds were the most active of U.S. convertibles traders, with an average trading volume of about $1.9 billion per fund over the 12-month period, which researchers noted was about double the volume of other convertibles investors.
By contrast, demand for convertibles outside the United States is growing, especially for securities from Asia/Pacific countries. European hedge funds increased Asia/Pacific holdings to 23% this year from 9% the prior year; U.S. convertibles investors' allocation to the region remains at about 9% this year, according to Greenwich data. European hedge funds are apparently trading convertibles less than their U.S. counterparts: Greenwich found that the average trading volume for the year by hedge funds was about e1.1 billion, compared with €900 million for other investors in European convertibles.