Fixed-Income Remains Promising, Veteran Investor A

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.

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