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Friday, 19th April 2024
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Current low default rate is not sustainable – IXIS CIB Back  
The current low default rate is not sustainable, an economist with investment bank IXIS Corporate & Investment Bank, told delegates at a recent hedge fund seminar in Dublin. He expects a small rise in these default rates, in the near future, and says that as a result, there will be more opportunities for risk arbitrage and relative value hedge funds. He added that the current environment is not attractive for fixed income arbitrage managers, with little volatility leading to difficult times.
2006 has been a very turbulent year for the hedge fund industry, Florent Pochon, an economist with IXIS CIB, told an audience of investment managers at a recent IXIS CIB alternative investment conference held in the Merrion Hotel on October 23rd. Despite a very promising first quarter, which saw hedge funds core their best returns in January, since February 2000, performances declined dramatically in May, and a risk aversion shock led to three negative months in a row, for the first time since November 2000. However, overall, Pochon said that the hedge fund risk/return profile remains attractive for the first eight months of the year.

With regards to particular strategies, long-biased strategies suffered losses over the year, while directional strategies are also lagging. However, Pochon added the caveat that indices are poorly representative.

Equity directional funds will be positive over the next few months, particularly on the euro side, said Pochon, as he believes that European stocks are currently undervalued.

Among the top performers are event-driven strategies, including distressed events, with LBO, M&A and high yield dynamics.

On the up are arbitrage strategies, as increasing dispersion are putting them back in the forefront, and convertible arbitrage strategies are continuing to improve. However fixed income arbitrage strategies are not performing well, with Pochon saying that the current environment is a difficult one for fixed income managers. This is because there is low volatility, no slope, and no trends to be expected.

Pochon doesn’t expect any big trend for currencies, with FX volatility trending downwards, and he added that he expects EUR/USD to remain a bit flat, and the yen to stay weak.

Credit quality remains excellent, Pochon said, with credit spreads very low, in line with default rates. However, Pochon expects a small rise in these default rates, and doesn’t expect them to stay at 0 for much longer. Hence, he says that there will be more opportunities for risk arbitrage and relative value strategies.

Also speaking at the seminar was Jordan R. Gershun, vice president of FrontPoint Partners LLC, a US provider of absolute return investment strategies, which has a fixed income management operation in Dublin. Gershun enlightened attendees on FrontPoint’s investment strategy.

Wrapping up the event were Thomas Leveille Nizerolle, financial accounting adviser with IXIS CIB, and Mike Tauby, of IXIS CIB’s alternative investment group, who both spoke on ‘alternative investment optimisation in respect to IFRS and Base II’.

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