Algebris Investments LLP, a $1.4 billion global financial hedge fund, is starting a fund focusing on capital securities that regulators insist banks must issue.
The London-based firm plans to start Algebris Coco Credit Fund in January to trade contingent convertible bonds, or CoCos, that regulators have earmarked as a vital part of bank buffers against future losses, said Ivan Vatchkov, chief investment officer of Algebris’s Asian unit. It plans to cap the size of the fund at $1 billion, he said.
Algebris’s global financials hedge fund gained 57 percent after fees in the past four years since inception in October 2006, compared with a 47 percent decline in the MSCI World Financials Index in the same period. The Algebris Global Financials Fund is a long/short equity and credit fund focused on banks, insurance, diversified financials and real estate.
The manager will invest in a “new and complex asset class” with its CoCos fund, Vatchkov said. Contingent convertibles automatically become equity when there’s a triggering event such as a decline in an issuer’s capital ratio or its stock falling to a pre-arranged price. The capital instruments would force investors in bank debt to help bear the cost of a bailout.
The manager, which opened its Asian office in Singapore in October, also plans to raise as much as $500 million for a fund focusing on emerging markets, Vatchkov, 32, said in an interview.
Conditional convertible capital is “going to be quite big because regulators will require it,” Vatchkov said. “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.”
Swiss regulators proposed in October that the country’s two largest banks, UBS AG and Credit Suisse Group AG, both based in Zurich, consider issuing CoCos. Lloyds Banking Group Plc in the U.K. and the Netherlands’ Rabobank Groep NV have sold similar debt instruments.
Algebris was set up in 2006 by Davide Serra, former head of equity research for European banks at Morgan Stanley, and Eric Halet, previously global industry analyst at Wellington Management Co., a Boston-based investment firm.
Algebris’s emerging-market fund, which started trading with $15 million of the partners’ own money in January, has returned more than 30 percent this year, Vatchkov said. The firm started marketing the Algebris Emerging Markets Financials Fund to investors last month, he said.
The firm opened an office in Singapore because it wanted to be close to India, Indonesia, the Philippines, Vietnam and Thailand, said Vatchkov.
“The most attractive opportunities are in the companies that have a market cap of under $2 billion,” he said. “They don’t tend to be very well researched because the investment banking fee potential is low and the trading volumes aren’t high enough to justify detailed research coverage.”
The fund plans to increase its trades in Asia, Vatchkov said. The region currently accounts for at least a third of Algebris’s portfolio, he said.
“A lot of the growth in the new economies translates into phenomenal growth for financial services providers which is where our expertise is,” he said.
The fund has been heavily invested in India this year, he said. It has a “strong preference for India over China because of the financial penetration opportunity versus the policy risk in China,” he said. While the fund also has a “strong long bias” in Indonesia, Thailand and the Philippines, it’s kept its “risk exposure low” in Japan, Taiwan and Australia.
Vatchkov relocated to Singapore from London at the end of September. He joined the hedge fund in 2008 from Credit Suisse, where he was a director on the finance and strategy team at its investment banking unit. Maria Gabriela Bianchini, a partner at Algebris, also moved from London to Singapore.
Algebris will offer in January versions of its global financials and CoCos funds that conform with Europe’s Undertakings for Collective Investments in Transferable Securities, a regulated fund format known as UCITS III, Vatchkov said. The UCITS funds will be targeted at individuals and institutions seeking easier trading, transparency in underlying investments and protection from increased regulatory scrutiny.
Algebris lost about 32 percent in 2008, posting most of the losses in September and October that year as Lehman Brothers Holdings Inc.’s bankruptcy caused global credit markets to seize up. The fund returned almost 31 percent in 2009 and 9.3 percent this year through October.