Growing differences in US and European convertibles markets, says report

The influence of hedge funds is driving leverage levels in the US and European convertibles markets in different directions, according to research published by Greenwich Associates, the Connecticut-based consultancy.

Hedge funds continued to expand their presence in the US convertibles market in 2004, with 74% of convertible user respondents to the Greenwich survey describing themselves as hedge funds. The percentage of European convertibles investors calling themselves hedge funds fell from 70% last year to 64% in 2004.

Hedge fund investors in US convertibles increased their average leverage ratios to 2.8 in 2004, up from 2.1 in 2003, according to Greenwich, reversing a previous decline from 3.1 in 2002. In Europe the ratio is down to 2.6 this year, continuing a downward trend of 4.6 in 2002 and 3.5 in 2003.

The average institutional investor in US convertibles securities held $1.6 billion in long market value convertible assets in 2004, up from $1.2 billion in 2003, driven partly by increased leverage levels among hedge fund investors, Greenwich said. This is in contrast to a slight drop in the long market value of European convertibles under institutional management, standing at $1.3 billion in 2004, from $1.5 billion in 2003.