Merrill hedge fund index drops 0.5% for week, but up 9.11% year-to-date

By Ronda Fears

Nashville, July 22 - The convertible hedge fund universe continues to post losses, with the Merrill Lynch & Co. master convertible hedge index down 0.45% for the week ending Thursday July 17.

Convertibles got hit on three fronts, noted Yaw Debrah, head of U.S. convertible research at Merrill.

First, he said the negative bond market reaction to Fed Chairman Greenspan's comments led to a sharp rise in the long end of the curve, which impacted longer maturity securities like the General Motors Corp. bonds.

Then, Washington Mutual Inc.'s announcement of an increase in its quarterly dividend to 40c from 30c served to remind investors that potential dividend increases will continue to dog convertible valuations.

And, he added, Lucent Technologies Inc.'s announcement that it was moving back its profitability date to next fiscal year from this year put investors on notice that speculative-grade spreads have probably run ahead of fundamentals.

On a positive note, equity market volatility moved higher in the week, with the VIX index up from 21.53 to 22.82. Convertible market implied volatility was stable at 39.87%.

The top five performers for hedge funds for the week were Charter Communications Inc.'s 5.75% due 2005 and 4.75% due 2006, Ligand Pharmaceuticals Inc.'s 6% due 2007, Baxter International Inc.'s 7% mandatory and Sealed Air Corp.'s convertible preferred that was called.

The bottom five performers for hedge funds for the week were Washington Mutual's 5.375% convertible preferred, Lucent's 7.75% convertible preferred and 2.75% due 2025, GM's 6.25% due 2033 and General Growth Properties Inc.'s 7.25% convertible preferred.

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