Tue, 01/04/2014 - 13:26
Philippe Jabre has been successfully managing convertible bonds for 30 years. Whilst at GLG Partners (between 1997 and 2006), Jabre honed his convertible bond strategy resulting in five funds with a combined AuM of USD7bn at its peak. In 2007, Jabre branched out and launched the JABCAP Convertible Bond Fund with founding partners, Mark Cecil (pictured) and Philippe Riachi.
Since inception the fund has generated consistently strong returns by combining a top-down thematic macro-driven approach with rigorous bottom-up fundamental analysis to identify the best trading opportunities within the convertible bonds market.
The fund portfolio currently holds approximately 111 convertible bond positions with a focus on liquid convertible bonds. Even though it is a hedge fund it will take a directional stance opportunistically, if and when the macro picture looks favourable.
“Last year, for example, the main source of returns in the fund was a macro bet on Japan and our ability to get leveraged exposure to that market through asset swaps on our convertible bond positions. This is a convertible bond where you create a swap to hedge out the credit risk and basically isolates the equity option,” comments Cecil.
Average position size within the portfolio is typically between 1 and 3 per cent. Hedging tends to be adjusted aggressively depending on market conditions. “We hedge either through single stock shorts or via market hedging; e.g. by going short Nikkei 225 futures against our Japan convertible bond positions,” adds Cecil.
One of the key benefits of convertibles is that they provide not only upside through exposure to equity markets but hedge against downside via the bond floor. This typically makes convertibles less volatile than equities. Last year, global issuance reached USD96.5bn and 2014 is shaping up to be a good year as M&A and refinancing activity is expected to pick up in a rising interest rate environment.
“In 2013 we saw a good pick up in single stock volatility, which was very supportive of our strategy. Our ability to generate outperformance came in two parts: Firstly, our asset allocation. We were positioned with a bias towards Japan and Europe and less of a bias towards the US. Secondly, it was our stock selection approach, which was both thematic and valuation-based (in respect to both the company and the convertible bond).”
In Cecil’s view, the market for convertibles in 2014 remains buoyant. Not that they are necessarily cheap “but they are fairly valued in an environment which is broadly supportive”.
In certain periods the portfolio is more yield-driven but Cecil says that in 2013 it was more equity-driven and that the focus was more on high delta bonds.
“We had a bullish view on equity markets generally speaking and we wanted as much exposure to the equity markets as possible.”
In terms of outlook for 2014, Cecil says that Japan will remain a strong theme in the fund but notes that the team sees opportunities in the US and Europe as well.
“We currently have negligible exposure to emerging markets. We think that might be an interesting theme for the second half of the year once this cycle of capitulation finishes as it will likely create some value discrepancies.”
On winning the award Cecil adds: “We would like to extend our thanks to Hedgeweek on winning this award and for their broad support of the hedge fund industry. We are delighted to win this prestigious award.”
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