Shortlist: Best convertible arbitrage/volatility hedge fund

The GAM Convertible Bonds Hedge Fund is managed and constructed on an entirely discretionary basis with overall responsibility for the strategy sitting with the investment managers, Ben Helm and Alex McKnight. The investment team of experienced investment professionals, each with a sector specialisation, backs them.

Once a trade has been executed, the co-managers monitor each position and the overall portfolio carefully for liquidity and to ensure the investment theme and fundamentals underpinning the position remain valid.

The fund uses a multi-strategy approach to trading convertibles including convertible arbitrage, directional trades, distressed convertibles, low premium carry trades and corporate action trades.

There is no strategy slippage. All themes involve convertibles. Interest rate, credit and equity risks may be variously hedged out.

The portfolio holds approximately 30-40 trades comprising around 70 individual positions across at least four of the five trade types at any one time. It is inherently diversified across global markets, with a distinct non-US bias.

Together with hedging instruments, the features are expected to help the fund produce positive absolute returns in almost all market conditions.

The fund invests globally with the main geographical focus being outside the US. There are no minimum or maximum geographical parameters or minimum credit quality required, allowing the managers to invest where they see the most promising pockets of opportunity at any given time.

External research comes from 10 to 12 international brokerage houses and banks with approximately 75% of research undertaken by the co-investment managers from primary sources and conducted in-house.

The entire team discusses major global macro-economic themes, with the co-investment managers for convertible bonds then interpreting and applying the themes as relevant to the convertible bond markets.

The co-managers then focus on the market segments that are most likely to be impacted by the themes, using a scoring system to solidify their views and highlight long and short opportunities.

These opportunities guide the in-depth analysis of individual ideas by the co-managers. These are researched from equity and credit analyst perspectives and scored systematically on a variety of metrics including strategic, structural, financial and bond/stock issues.

This analysis focuses particularly on assessing each company’s growth prospects compared with current market views to determine which companies are good candidates for long or short positions. This process results in a set of opportunities from which the co-managers assemble a portfolio that is diversified across themes, regions, sectors and trade types.

Risk management procedures are stringent. Convertible bonds do not represent the most liquid instruments and reduction in market liquidity may hurt the fund. Based on testing, GAM estimates around 50% of the portfolio can be liquidated within 10 working days with the remainder within 20 days.

RiskMetrics reports are run every day to assess the value at risk (VaR) of individual positions, strategies and the portfolio as a whole. Both historic and speculative stress tests are also run on a regular basis to reveal any potential correlations in the portfolio.

Stop-losses and stop-profits are established for all trades and where stops cannot be applied. Review levels are set for extensive re-examination of the logic of the trade.

VaR is also monitored and if it becomes unfavourable then trades are closed out.

The fund has various position concentration limits such as a maximum of 20% assets invested in one (non-OECD government, for example) issuer, a maximum 10% of net asset value (NAV) to be invested in each illiquid asset.

The team monitors this guideline with a view to reducing the limit once the fund reaches $300 million in size. In addition a maximum 20% of NAV can be invested in illiquid assets of a single issuer.

Fund facts
Full name of fund: GAM Convertible Bond Hedge Fund
Name of portfolio managers: Ben Helm and Alex McKnight
Name of investment/management company: GAM International Management
Contact information: Lynn Mah, 12 St James’s Place, London SW1A 1NX (+44 (0) 20 7393 8848; lynn.mah@gam.com)
Launch date: July 1, 2005
Assets under management: $139.2 million (at March 31, 2011)
Annualised return: 7.28%
Annualised volatility: 12.80%
Sharpe ratio: 0.34
Strategy: multi-strategy convertible arbitrage, directional
Share classes: euro, yen, US dollar (type 1 shares); US dollar (type 2)
Administrator: JP Morgan Hedge Fund Services
Auditor: PricewaterhouseCoopers
Custodian: Citigroup Global Market; Morgan Stanley
Prime broker: Citigroup Global Market; Morgan Stanley
Domicile: Cayman Islands
Management fee: 1.5% (type 1); 2.0% (type 2; excludes administration and custodian fees)
Performance fee: 20% of the appreciation in the net asset value per share on a high water mark basis
Minimum investment: $500,000
Lock-in: none
Redemption/liquidity terms: subscription: first business day of each month with one business days' notice given prior to the deal date; redemption: any dealing day with 90 calendar days’ notice given prior to the deal date (type 1); 30 days (type 2); where the final day falls on a non-business day, notice is given the previous day