The end of the stock market bubble in 2000 played an important role in hedge fund managers starting to appreciate the importance of analysing correlation across asset classes, according to Michael Fuhrman of inter-dealer broker, data and analytics provider GFI Group Inc.
One of the most significant recent developments in the investment market over the past few years has been the erosion of compartmentalisation in the trading of securities instruments and the emergence of a multi-asset class mentality, according to product manager Michael Fuhrman of inter-dealer broker, data and analytic software provider GFI.
'Prior to 2000, the world was a large one in which you traded stock, or bonds, or loans, or credit derivatives, and you specialised in your field or asset type,' says Fuhrman. But all that changed, he argues, when the stock market bubble burst in early 2000 and many of the hedge fund managers who had capitalised on the bull market started to search for new opportunities to achieve positive returns.
'Many managers started to focus at that time on convertible bonds, which always do very well in a very volatile market,' he says. 'They realised that convertibles was probably the sector of the market that would allow them to make money. They are a quirky, complicated kind of instrument that combines fixed income with equity risk and credit risk.'
The next step was that as managers traded convertibles and their close cousins, exchangeable bonds, the hedge fund industry started to become familiar with credit default swaps, and to appreciate that all three aspects of a convertible bond - equity, credit and fixed income - were valuable sources of market information. Says Fuhrman: 'From late 2002 onward, the notion started to grow that as an investor or trader, you want to glean information from as many different asset classes as possible - you don't want to restrict your view to one security only.'
The market conditions that prompted this new perspective were transient - starting in early 2003, markets became less volatile, the stock market began its recovery and convertible bonds became less attractive - but the shift in mindset proved permanent. Fuhrman says: 'By then we were starting to see the emergence of capital structure arbitrage funds, which sought to find and capitalise on mispricing between securities from the same issuer such as their loans, senior bonds, subordinate bonds, preferred securities, common shares and credit default swaps.'
This opportunity has prompted Nasdaq-listed GFI to create MarketHub, an online system product that brings together historical and real-time price data, market news and analysis specifically to analyse correlation across asset classes. The first version of MarketHub, unveiled in January, highlights the link between the credit and equity markets, enabling users to achieve a better understanding of market movements, enhance their market timing and improve their investment and trading decisions.
According to GFI, the credit market offers investors greater liquidity than the bond market as well as trading opportunities unavailable in equity markets, for which they can also act as a leading indicator. Says Fuhrman: 'This idea is pretty well ingrained now. When an investor or trader today forms a view on a given credit, such as Vodafone, he wants to be able to express that view with any or all the instruments in his palette.'