Focus on Oyster funds – Market evolution makes re-run of 2008 unlikely for convertibles

Global markets may be facing a catastrophe a magnitude larger than the banking crisis of 2008, but the convertible bond market is unlikely to face its own re-run of that difficult year, according to the manager of Syz & Co’s Oyster Global Convertibles fund.

Back then convertibles fell almost 30% in 12 months, according to the Merrill Lynch G300 Global Convertible Index, and long-only funds fell with them.

Hedge funds, which controlled about 80% of the global convertible market, fell further (by 34%) as they sold to raise cash for redemptions, and as a short selling ban on financials partly hamstrung their arbitrage strategies.

Although a far larger collapse – of the Eurozone – threatens now, Hart Woodson, who runs the Oyster fund from $6bn convertible specialist Advent Capital in the US, says this would not necessarily cause a re-run of 2008.

“Back then, the market was 75% or more hedge funds, and they were many times levered, which is largely why the asset class did not hold up in 2008. Now the market is a 50/50 mix of defensive equity managers and bond investors who want less duration,” Woodson says.

The Oyster fund he runs concentrates on convertibles trading within 20% of the bond floor, and scales out of trades as the bonds appreciate to 30% above the floor, taking profits along the way. This forces Woodson to buy lower and sell higher for clients in the Oyster fund.

Woodson notes some interesting trading dynamics in the market, as instruments approach different valuation levels.

“As a convertible goes up, it trades more like an equity. The hedge fund community is more focused on the balanced part of the curve, and the price sensitivity is more like 50% to the underlying equity.

“We are looking at bonds trading closer to the bond floor. If a stock comes down, most investors who are hedge funds and balanced-type-managers will sell the bonds, because they do not have the pay-off they want. There has been a vacuum point where there has been a change of ownership, even within the convertible market.

“If it falls further the cross-over buyers will come in because they will see the convertible bond pari passu with straight debt.”



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