CQS’s Oldest Global Hedge Fund Doubles Asian Bets in Two Years

Date: Tuesday, April 13, 2010
Author: Associated Press

CQS U.K. LLP, a London-based manager of $6.7 billion in assets, has doubled the Asian allocation of its oldest global hedge fund since 2008 as it bets on a recovery in the region’s convertible bond market.

Asia now accounts for 20 percent of the long investments of the $1.8 billion CQS Convertible and Quantitative Strategies Fund, up from a March 2008 low of 8 percent, Michael Hintze, founder and chief executive officer, said in an e-mail.

“We think there are more growth opportunities in Asia,” he said. “Convertible bonds are an instrument of choice in Asia both for investors and issuers.”

CQS has been raising its investments in Asian convertible bonds, betting prices will rebound after they were pummeled during the financial crisis. The region’s low government debt levels means there will be less pressure to raise taxes or cut government spending, helping spur faster economic and corporate earnings growth, Hintze said.

The 10-year-old CQS fund employs a convertible arbitrage strategy, which typically involves buying bonds that can be exchanged for a company’s shares and at the same time selling the underlying stock.

Most of the changes in its Asia weighting are due to a conscious decision to increase investments in the region, rather than price appreciation of existing holdings, Hintze added.

Leveraged buyers such as hedge funds and banks’ proprietary trading desks, which once accounted for 80 percent to 90 percent of the Asian convertible bond market, dumped such securities during the financials crisis to cut down on borrowing.

Bond Buybacks

The CQS fund began to build up its Asia allocation in the first quarter of 2009, amid convertible bond buybacks by their corporate issuers in the region and purchases by other regional investors, especially private banks, Hintze said.

“That pattern was not dissimilar to the pattern that was seen post the Asian crisis in 1997,” Hintze said.

Olam International Ltd., a Singapore-based farm commodity supplier, bought back $117.6 million of convertible bonds in December 2008 to take advantage of a collapse in prices and improve its balance sheet.

The fund’s allocation to Asia rose another 5 percentage points in the past year, Hintze said. It favors South Korea, Taiwan, Japan, Hong Kong and China as the most attractive markets.

The mix of investors in Asia’s convertible bond market has changed in the last two years; now it is about equally split between leveraged buyers and long-only investors who buy and hold the bonds and focus on the yields, Hintze said.

Competition for trades targeted by hedge funds like CQS’s has been reduced because leveraged and long-only investors value convertible bonds differently, and many banks’ proprietary trading desks have significantly reduced their trading of the securities, Hintze said.

CQS Convertible and Quantitative Strategies Fund returned 31 percent in 2009, according to CQS. The CQS Asia Fund, which employs the convertible arbitrage strategy and also invests in other fixed-income securities and stocks, gained 31 percent last year, the company said.