Key Takeaways
- • Chris McGuire's Phalanx Capital Management launched in 2004 to trade convertible bond, volatility, and capital structure arbitrage, and he has returned to Japan through Eagles View Japan Management after a period out of the market.
- • The firm returned 24% last year and is up more than 20% so far this year, according to the article.
- • Japan's convertible bond market is now about $20bn versus roughly $400bn in the US, with Taiwan and Hong Kong each exceeding $100bn, a size McGuire says limits capacity for very large hedge funds.
- • Rising borrowing costs and a soaring equity market have allowed Japanese companies to issue zero-coupon convertibles, reviving the strategy after years of dormancy following the GFC, short-selling restrictions and BOJ negative rates.
- • McGuire's holdings span airlines, railways, steel companies and a space-debris cleanup firm, and he uses asset swaps to isolate the equity option.
Summary
Convertible bond arbitrage, the strategy that helped build Citadel under Ken Griffin, is regaining relevance in Japan, according to an article profiling Chris McGuire. McGuire launched Phalanx Capital Management in 2004 after several years on the sell side at major banks, trading convertible bonds, volatility and capital structure arbitrage. He described Japan during that period as a market of cash-rich companies trading below book value, with an investment universe of close to 1,000 issues spanning almost every industry.
The opportunity faded as the global financial crisis brought redemptions and deleveraging, and short-selling restrictions removed a key tool for the strategy. The Bank of Japan's easing and negative rates from 2016 further eroded its appeal, because straight debt was nearly free and a cheap coupon in exchange for an equity option no longer compensated investors. McGuire eventually exited the market and returned a couple of years ago through Eagles View Japan Management.
Conditions have shifted. A strongly rising equity market, driven by corporate capital deployment, prompted BOJ action against inflation, and higher borrowing costs now allow companies to issue zero-coupon convertibles. McGuire says the fund holds a broad-based exposure across sectors, citing airlines, railways, steel companies and a space-debris cleanup company. He uses asset swap strategies to strip out the fixed-income component and retain the equity option, though he acknowledges that high credit quality limits the number of high-yield, high-volatility opportunities.
McGuire argues Japan offers opportunities comparable to the largest Western economies and that investors often misread its market behaviour. He cited the recent yen intervention by Treasury Secretary Scott Bessent as an example, noting that investors who shorted the yen on the view that Japan was lagging were caught out by the unique relationship between public and private governance. He also said the nearly 115% rise in the Nikkei 225 over five years has left Japanese equities under-covered.
The small size of the market is a deliberate advantage in McGuire's view, since it deters very large hedge funds seeking to deploy tens of billions of dollars. The firm returned 24% last year and is up more than 20% year to date, according to the article.
The opportunity faded as the global financial crisis brought redemptions and deleveraging, and short-selling restrictions removed a key tool for the strategy. The Bank of Japan's easing and negative rates from 2016 further eroded its appeal, because straight debt was nearly free and a cheap coupon in exchange for an equity option no longer compensated investors. McGuire eventually exited the market and returned a couple of years ago through Eagles View Japan Management.
Conditions have shifted. A strongly rising equity market, driven by corporate capital deployment, prompted BOJ action against inflation, and higher borrowing costs now allow companies to issue zero-coupon convertibles. McGuire says the fund holds a broad-based exposure across sectors, citing airlines, railways, steel companies and a space-debris cleanup company. He uses asset swap strategies to strip out the fixed-income component and retain the equity option, though he acknowledges that high credit quality limits the number of high-yield, high-volatility opportunities.
McGuire argues Japan offers opportunities comparable to the largest Western economies and that investors often misread its market behaviour. He cited the recent yen intervention by Treasury Secretary Scott Bessent as an example, noting that investors who shorted the yen on the view that Japan was lagging were caught out by the unique relationship between public and private governance. He also said the nearly 115% rise in the Nikkei 225 over five years has left Japanese equities under-covered.
The small size of the market is a deliberate advantage in McGuire's view, since it deters very large hedge funds seeking to deploy tens of billions of dollars. The firm returned 24% last year and is up more than 20% year to date, according to the article.
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