Pension funds snap up convert alpha-manager

LONDON (Reuters) - Long-term investors are raising their allocations to convertible bonds even as shorter term traders are pulling back from the asset class, a hedge fund executive said.

Convertibles have come back into favor among conservative investors after enjoying substantial gains in 2009. The same investors had fled the asset class during the credit crisis as the price of convertibles collapsed.

"The market has changed, there is reduced prop desk and hedge fund activity, with more long only investors such as pension funds coming in," said Oliver Dobbs, chief investment officer of hedge funds firm CQS.

His fund company invests a healthy chunk of its $6.5 billion under management in convertible arbitrage, a strategy which seeks to exploit discrepancies between the prices of convertible bonds and the underlying securities.

Some investors have now cashed out of convertibles after a rollercoaster two years saw massive losses at the tail end of the credit crisis in 2008, followed by an equally outsize rally in 2009 as credit markets recovered.

That was a rally driven by beta, or market returns, as convertibles returned to more realistic prices, Dobbs said, while this year managers capable of delivering relative value returns, by profiting from price inefficiencies in the market, would do well.

If he is right, then paradoxically the institutional investors such as pension funds now investing in its new long-only Convertible Opportunities Fund could mop up the alpha left behind by traders.

Dobbs said European convertibles would be sustained this year by improving market conditions.

He said capital markets activity has picked up particularly well in Europe, and with companies diversifying away from their bank loans, the new issuance calendar is strong.

Dobbs said convertibles were a good relative value play because of various ways in which investors can monitor and mitigate risk.

"The great thing about convertibles is they have a relatively short duration. You can be more accurate (in estimating returns) rather than having to predict industry trends," he said.