Prodigy Asset Management, a Taipei-based hedge fund set up by a group of ex-Yuanta Securities traders to trade convertible bond strategies, has launched a new fund. The Phoenix Fund was launched in March with $10 million under management, raised mainly from Prodigy's existing Taiwanese investor base.

"The CBs we're investing in are bank guaranteed, with very limited downside risk, but high potential upside," says Prodigy's executive director, Samuel Wang. "We think the CB market is the best way to gain equity and forex exposure to China."

Wang backs up his argument by citing that the Shanghai equity index has fallen by 15% from 2002-2004, whereas China's convertible market has risen by 25% over the same period. Wang hopes to grow the fund to $30 million by the end of the year.

The fund's size is limited by the size of the CB market, consisting of 34 issues, of which Prodigy's research team has determined 10-15 as being attractive investments. Access to QFII quota, which Prodigy has been receiving through its relationships with Morgan Stanley and UBS, is another limitation on the size of the fund.

Prodigy is not the first Taiwan-focused hedge fund to launch a China CB fund. Taipei-based UG Investments, founded by Eugene Wang, launched its China CB dedicated fund with $10 million earlier this year.

"We've been researching the CB issuers in China for over a year now with plans to launch a dedicated fund," says Wang. He has brought ex-Yuanta convertible trader Albert Hsu on board to focus on managing the China fund.

Prodigy has two existing funds which focus on the CB market in Taiwan. The recently launched Opportunities Fund, which follows a market neutral convertible arbitrage strategy has faced tough market environments, returning 1.2%during 2004.

"Global equity volatility has come down to an eight year low," says Wang. He expects volatility to stay at current levels for a few more months before picking up again. "We have been very conservative for the past few months and have kept our fund unlevered since inception. However we're now begging to add our position and increase leverage as we believe volatility will pick up soon."

Prodigy's first fund, the long-only convertible fund, recently reached its second anniversary, returning 24% since inception. Wang says that he has recently begun to expand the fund's coverage beyond its initial Taiwan focus, to include Southeast Asia.

"We plan to increase our non-Taiwan portfolio to 30% by the year-end, from less than 10% now," he says. "We believe the fund will benefit from record low level of implied volatility to Taiwan CBs and the re-weighting of the Taiwan market by the MSCI this year."