Steve Diamond wrote:
>In any case, let's look at what Maurer himself says: since he thinks
>finance "discourse" is not understandable on its own terms -
>"Securitization, thus, is not obvious or self-evident" - he is here to tell
>us what is really going on - and THAT is the fundamental conceit behind all
>of deconstructionism, postmodernism, etc. That somehow there really is
>something behind the wizard's curtain.
Well, the sun _does not_ turn around the earth... Elemental particles can be
represented in terms of a wave equation... The old Democrit said that our
senses fool us. There is indeed something behind that curtain. (Disclaimer: I'm
not engaging in the discussion about deconstructionism. You will see my point
in the rest of this post.)
And for us, laypersons, financial "discourse" is anything but self-evident.
Some examples:
They say "the market(s)" when they mean "financial markets"
They say "technology" when they mean "IT hardware and sotfware"
They say "investors" when they mean "speculators"
They say '"risk management" when they mean "bet"
They apply probabilistic theory and normal distributions to the ups and downs
of "markets" that behave in a chaotic way (how do you say "espérance
mathématique" in english?)
And they say "hedge funds" for the new new craze for the speculating masses.
For instance, what are those f... hedge funds trying to "hedge for" with
convertible bonds arbitrage? (See below my signature)
Manel
Quote:
Funds Are Spectators as Convertible Sales Soar: Mutual Funds
By Elizabeth Stanton
Spokane, Washington, Aug. 20 (Bloomberg) -- Companies such as Lucent
Technologies Inc. have sold a record $81 billion in convertible bonds this year,
and mutual fund manager Ed Cassens still finds few worth buying.
That's because Wall Street firms are structuring the bonds to convert into
shares at prices that are too high relative to where the stock trades at the
time of the sale, said Cassens, manager of the $520 million Nations Convertible
Securities Fund.
That structure appeals to hedge fund investors, who buy convertible bonds as
part of an options strategy, while mutual funds look for income and a stock
price gain, fund managers say.
``There has been such growth in the hedge community that underwriters are
catering to their needs more than our needs,'' said Cassens. ``That makes it a
little difficult.''
Convertible bonds are bonds that can be converted to the issuer's common stock
at a specified price. They allow investors to capture a portion of the price
gain of the underlying stock, while the coupon income from the bond limits
their losses in the event the stock price falls.
For example, convertible bonds issued Aug. 13 by Network Associates Inc. pay
interest at the rate of 5.25 percent through 2006, and are convertible into the
company's stock at a price of $18.07 -- 23 percent higher than today's closing
price of $14.72. That means Network Associates shares have to gain at least 23
percent for the conversion feature to pay off.
The Network Associates deal was one of the few this year that have been
palatable to managers of convertible bond mutual funds.
No Coupon
More typical of this year's record convertible bond issuance are Household
International Inc.'s $1.22 billion of bonds sold July 26, said Jason Voss,
co-manager of the $208 million Davis Convertible Securities Fund. He said he
hasn't bought a new convertible bond in the past year.
The bonds, which do not pay a coupon, convert to Household International's
common stock at a price of $110.84, 69 percent higher than today's closing
price of $65.50.
The higher conversion premium makes it less likely an investor will participate
in share price gains -- precisely what mutual funds are trying to do.
``We're trying to add value as stock pickers,'' said Ed Perks, manager of the
$235 million Franklin Convertible Securities Fund. Perks has bought fewer than
20 percent of this year's new issues, compared to nearly 40 percent of last
year's.
Hedge funds, on the other hand, practice convertible bond arbitrage. Rather
than banking on a gain in the underlying shares, they sell them short. In a
short sale, an investor sells borrowed shares, expecting to be able to buy them
back later at a lower price.
Selling short the underlying shares allows the hedge funds to profit if the
stock drops. Hedge funds then attempt to profit by trading the shares. They
hope for more volatility in the price of the shares than was implied by the
price they paid for the conversion option embedded in the bond.
``You're looking for the ability to short the stock against the convert long
and still capture a nice yield or cash flow,'' said Nick Calamos, managing
director of Calamos Asset Management. At the same time, ``you want a volatile
enough stock that you can take advantage of trading profits,'' Calamos said.
Through a combination of coupon income, if any, and interest on short-sale
proceeds, the strategy aims to earn cash flow at a rate of at least 7 percent
and to earn an additional 3 percent or more in trading profits, Calamos said.
Calamos Asset Management runs five convertible bond mutual funds, four of which
invest outright. The fifth fund, Calamos Market Neutral Fund, practices
convertible bond arbitrage.
Quick Pricing
There is no foolproof way of measuring the share of new convertibles that are
being crafted for hedge funds rather than for outright investors since both
types may participate in any given deal, said Venu Krishna, convertible bond
analyst at Salomon Smith Barney.
Still, the share of new issues that, like Household's bond, do not pay coupon
income, can serve as a guideline, Krishna said. Through July 31, zero-coupon
bonds accounted for $31.5 billion, or 52 percent, of the $61 billion of new
convertibles sold this year. Last year, zero-coupon convertible issuance
totaled $16.5 billion, 28 percent of the $59.5 billion total.
Another indication that many convertible bonds are being structured for hedge
funds rather than for outright investors is how quickly they are priced by
underwriters after having been announced, said Tom Wynn, manager of the $700
million MainStay Convertible Fund.
Wynn said he got to the office today at 7:45 a.m. in New York and learned that
underwriters would be pricing a convertible bond for HCC Insurance Holdings
within a few hours.
Salomon Smith Barney's Krishna said nine of the 10 convertible bonds
underwritten in July were overnight transactions -- announced after the market
close and priced the following morning.
Mutual fund investors buy convertibles because they are bullish on the
underlying shares, he said.
``How do I know that if I haven't been able to do my work?'' Wynn said. ``The
hedge guys don't need to know as much about the common stock because they're
going to short it anyway.''
