NAPLES, Fla. (HedgeWorld.com)-- Long time hedge fund investor and LJH Global Investments President James Hedges has a prescription for the turbulent times of 2003. He is focusing heavily on fixed-income arbitrage, where he sees broad opportunity, and equity market neutral, where managers can take advantage of market volatility.
The many opportunities that make fixed-income promising in this environment become clear when you look at various sub-strategies within the field, such as mortgage-backed arbitrage, global yield curve arbitrage, credit arbitrage, as well as possibly distressed high yield bonds and convertible arbitrage, he argued, speaking at a teleconference.
"We expect that volatility in the fixed-income sector is going to continue in 2003," Mr. Hedges said, pointing out that interest rates are at a historic low in the United States, the yield curve is extremely steep and Federal deficits mean there will be a lot of Treasury issuance.
He cautioned, "Although this volatility should create great trading opportunities, it also creates a fairly risky environment." Still, managers will be able to finance their positions at very attractive levels due to low interest rates, he said. He does not expect rates to increase this year.
At the Other End
Bond arbitrage hasn't been on everybody's radar. For example, in a recent Deutsche Bank survey, large percentages of investors named macro, distressed securities and long/short equity as the strategies with expected strong performance in 2003 Previous HedgeWorld Story. But Mr. Hedges emphasized that fixed-income arbitrage covers a wide set of strategies and tends to be misunderstood because most investors lack the proper tools to do due diligence and risk management in this field.
He also favors market neutral managers. They offer diversification, since they can adjust their positions quickly and tend to have a large number of small positions, he explained. "They have a very attractive risk reduction and defensive attribute in a portfolio of hedge funds," he said. In his view, other likely strong performers for 2003 are convertible and distressed strategies.
Risk or merger arbitrage is at the other end of Mr. Hedges' strategy evaluation scale. Last year was the worst in a decade for M&A deals, lowest in both number and dollar volume. In addition, he notes, even when there are deals, prime brokers are often pricing stocks at levels that take returns out of the strategy.
"However, before everybody counts it out permanently, I remind you that managed futures, short-only managers and global macro--2002's top performers--were also declared near dead only 18 months ago," he quipped. On the basis of his experience, he is certain that merger arbitrage will have its day in the sun again.