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Polar Capital launches fund to focus on convertibles

Polar Capital launches fund to focus on convertibles

Launched at the start of January, the Polar Capital Global Absolute Return fund is a long/short absolute return fund, managed by its global convertibles team. 

Managers David Keetley (based in London) and Steve McCormick (based in Connecticut) each have more than 30 years’ experience in the field of absolute return and convertible bonds. 

An offshore vehicle domiciled in Ireland, it will invest predominantly in convertible securities. Most positions will be hedged and it will also have the ability to hedge interest rates. 

It will target returns of 5 per cent to 8 per cent a year, with limited downside and a return volatility of about 6 per cent. Polar Capital says clients do not want 3 per cent return with 3 per cent volatility – they want managers who can manage risk when needed, while also being able to position the portfolio for market opportunity when presented. This fund aims to do exactly that.

It will have the characteristics of a long/short equity fund except that the long exposures will be generated through long convertible positions.

By being long a convertible and short the underlying equity it substantially reduces basis risk relative to a typical long/short fund: if a stock falls in value, at some point the convertible will become like a bond, so should fall less and also put the investor higher up the chain in terms of getting money back if a company goes bust.

If a stock price rises, the convertible acts like an equity, so this fund is playing asymmetric risk-reward in a very clever way. 

The underlying investments will be split into five categories: equity hedged convertibles, asymmetric profiles, put trades, income/defensive investments and covered convertible call writing. The focus will be on large and medium-sized companies around the world. 

It is worth noting also that the fund has an independent board of non-Polar Capital investment professionals, and will be stress-tested daily for equity and credit shocks to limit any anticipated maximum drawdown. 

It has a 1 per cent annual charge plus a 15 per cent performance fee, subject to a high water mark – which is standard for Polar Capital products like this. 

It looks very interesting, but is quite complex, so it will not be for every client.

It could make a good diversification tool in a portfolio however, as it should have a low correlation to other assets and will offer some downside protection at times of market stress, while still having the flexibility to achieve decent returns in stronger market environments.

Darius McDermott is managing director of FundCalibre