Algebris CoCo Fund Up 45% As Market Swells

Nov 16 2012 | 12:56pm ET

Two years ago, Algebris Investments launched one of the first contingent convertible bond hedge funds. Now managing by far the largest such fund, it's reaping the rewards.

The Algebris CoCo Fund has returned 45% this year—better than 10 times the average hedge fund return—the Financial Times reports. And the firm sees growing opportunities for the US$900 million fund as banks issue more and more CoCos, which are designed to help them meet stricter capital requirements. The CoCos market could grow to as much as US$1 trillion in size, according to Barclays.

"The instruments are getting more and more complex," Algebris chief Davide Serra told the FT. And hedge funds with the ability to analyze the hard-to-value bonds and to trade them efficiently have a huge opportunity on their hands.

"If you own [financials] equity, your dividend yield has collapsed," he said. "If you own credit, though, you get paid a yield twice that of the equity. It's a no-brainer."

"Two or three years ago, we decided to refocus mainly on credit," Serra continued. "As a global financials fund, equity has become too random."

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