Decillion Investment Management plans to increase the use of derivatives in a recently launched convertible arbitrage fund by raising capital from external investors. Derek Watson, advisor to the fund in Nyon, Switzerland, said it hopes to raise EUR25 million (USD22.8 million) by year-end and then close the fund when it reaches EUR300 million, which he predicts will be within two years. The fund uses interest-rate swaps, credit default swaps and asset swaps to isolate the equity component of convertible bonds.
The market neutral fund was launched in May and focuses on the European convertible bond and equity markets. It has been run with Decillion seed capital to establish a track record before it was opened up to investors. In the last three months it has returned 12% on an annualized basis, the target is a 12-15% return with a standard deviation of 8%. The prime broker is Morgan Stanley. Watson said the fund will be free to trade derivatives with any major derivatives house.
Watson said the fund is not leveraged at the moment but will increase its leverage to between four and six times its value when volatility in the equity markets increases.
Decillion Investment Management is launching the fund now as part of the investment manager's strategy to offer a range of hedge funds, according to Watson. The company already runs a South African equity long/short fund.
