Hedge funds have proven rather adept at profiting from the banking crisis and bailouts. So it's no surprise to see one jumping on yet another opportunity, one created by the reform of the banking system.
Algebris Investments next month will launch a hedge fund investing in contingent convertible bonds. The new securities, being pushed on banks by anxious regulators, would convert into stock if, among other things, the issuer's capital ratio drops below a certain point. The idea is to force buyers of bank debt to pony up if another bailout becomes necessary in the future.
So-called CoCos are "going to be quite big because regulators will require it," the new fund's Singapore-based manager, Ivan Vatchkov, told Bloomberg News. "It's going to be attractive because the yields are going to be relatively high and early inefficiencies in pricing due to investor unfamiliarity will likely offer capital appreciation potential."
The Algebris Coco Credit Fund will have a US$1 billion capacity.
Vatchkov, Algebris' Asia chief investment officer, said the firm doesn't plan to stop with the CoCos fund: The London-based firm hopes to raise US$500 million for an emerging markets fund it launched in January with US$15 million in partner capital. The Emerging Markets Financials Fund is up 30% this year, and the firm began marketing it last month.
Algebris also plans to launch UCITS III-complaint versions of both the CoCos fund and its four-year-old Global Financials Fund.