The new breed

A number of hedge fund and prop strategies are looking decidedly out of favourin the wake of this year’s rise in equity markets. One of the more recent innovations – capitalstructure arbitrage – has bucked this trend. Originally the province of a smallnumber of sophisticated dealers and a handful of funds, the strategy has caughton with a growing poolof investors, including Belgium's KBC and French investment giant Axa ( seearticle ).

One sticky problem not captured by the Merton models on which the strategy is based is the tendency of companies to change their capital structures to suit their strategic or tactical needs, rather than keeping them stable for the benefit of arbitrageurs. This twist is keeping arbitrageurs on their toes.

Middle-market loan securitisations have been a bright spot in the credit marketsthis year. These deals offer investors a degree of collateral diversificationthat’ s difficult to achieve