CQS raises $750 million for convertibles

LONDON (Reuters) - Hedge fund firm CQS has raised $750 million from institutional investors for convertible bond strategies over the last six months as pension funds and insurers seek to improve their investment diversification.

The sum includes $270 million raised by CQS's long-only Convertible Opportunities Fund launched in June 2009, which has returned a net 11.62 percent to end-December.

Speaking at the Reuters Private Equity and Hedge Funds Summit on Tuesday, Oliver Dobbs, CQS's chief investment officer, said this had predominantly come from European pension funds.

"This wasn't a business for us a year ago," said Dobbs. "I don't think it's a fad, these flows are likely to continue."

Convertible bonds can be exchanged for shares at a pre-stated strike price, giving them both bond-like and equity-like characteristics.

Dobbs said he had heard a number of reasons as to why pension funds were embracing them, from risk-adjusted returns to diversification benefits.

Convertibles had a terrible 2008 as hedge funds and proprietary trading desks, which had dominated the market, became forced sellers in the credit crunch as they had to unwind positions, but they recovered from their lows in 2009.

The market is now seen as more stable, as long-term investors such as pension funds, mainstream asset managers, and insurers now make up about 50 percent of market participants.

"It's better that the market is diverse with different buyers and sellers as they follow different trading strategies," said Dobbs.

For example, the long-only funds tend to play just directional price movements whereas hedge funds will put on shorts and relative value plays, buying when others are selling and vice versa.

Dobbs believes 2010 will be a good year for convertibles, although returns will struggle to match 2009 as the market bounced from its lows.

CQS has some $6.7 billion under management and runs a variety of credit-related funds and strategies.