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Hedge funds look for new game plans

Convertible arbitrage and short-selling have been the cornerstones of hedge fund strategies. Competition and difficult underlying markets, however, are forcing managers to reconsider their game plans.

Does anyone mind style drift? | Amplitude Capital: maximizing short-term trends | Joe Feshbach Partners: 180 degree turn | Axis Capital: revolutionizing arbitrage

Helen Avery looks at the ways in which they are switching strategies to keep up with the pack.

NABIL DEBS STARTED running hedge fund Plutus Convertible Europe at the beginning of 2004. As its name suggests, Plutus was predominantly a convertible arbitrage fund. One year on, however, most of its assets are invested in equity long/short, with convertibles only 15% of the portfolio. Debs had shifted the fund to follow a multi-strategy discipline, and renamed it Plutus Valorem. Behind this decision lay capacity restraints and reduced opportunities in the underlying markets.

Five years ago, Debs's move would have rung alarm bells with investors. "Style drift" was a derogatory phrase implying that a manager had lost his edge in his own strategy. Switching into a strategy in which a manager might be less qualified caused concern. Nowadays, however, investors demand that their managers alter their strategies if returns are falling. "No-one wants to be stuck in a failing strategy," says Debs.

It's a glimpse of where the hedge fund industry is headed.

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