New book on convertibles aims to educate potential players, is a 'good read' for seasoned pros

By Rebecca Melvin

New York, March 7 - With his second book on financial markets and convertible bonds, in particular, Bill Feingold seeks to encourage the supply and demand of this asset class, which he dearly loves for its unique blend of fixed income and stock-like qualities, and to which he is unwaveringly committed.

The book, Beating the Indexes: Investing in Convertible Bonds to Improve Performance and Reduce Risk, is set for publication May 14 by Financial Times Press, according to Amazon.com. And it is itself a unique blend of storytelling and textbook, aimed at bringing convertible bonds to a new audience: individual investors.

There are other audiences too, Feingold says - corporate treasurers, for one. But a primary raison d'être for the book is individuals.

Feingold believes convertibles are well suited for people with longer horizons like outright players and retail investors, who make decent selections, hold them for three to five years and can then make 30% to 40% return on their investment.

In fact, convertibles are rather ill suited for their natural participants: hedge funds, he argues, because their participation sets up a host of technical dynamics that often work against the intrinsic properties of the bonds.

"The natural participants aren't the best suited to it. Redemptions are a big problem and you can't rely on investors to stick with you," Feingold told Prospect News recently over a cup of coffee in midtown Manhattan.

"Being liquidity-driven works against hedge funds, ultimately," he said. On the other hand, he is absolutely convinced convertibles can do better than stocks for individuals and others with longer horizons.

"Buy at 100, sell at 130 where the risk/reward profile diminishes. Keep the natural properties working in your favor," he said. And at the end of the term, the original investment is recouped in full.

He gained this perspective he said in the book, "by running a couple of convertible hedge funds and spending many more years in the field...." And in this way, he determined that "for investors not so worried about day-by-day, tick-by-tick price changes, the value of convertibles became clearer and more persuasive than ever."

Regarding the realities of the current market Feingold is not ignorant: dwindling supply, poor new issuance, too many players chasing too few trades.

"Market conditions are not great," he conceded. "It's hard getting used to this 0% rate world, and optically it's looking more expensive."

But technicals have always driven the market, and they always will, he said. Therefore, make the technicals your friend.

What he's doing with Beating the Indexes, he says, is helping listeners educate themselves and ready themselves for the next big technical blow up, which he says occurs every three or four years in the convert market like clockwork.

It's at that point that courage is needed to move in and buy when the herd is moving out.

"If there's a big sell-off in stocks - and I'm not saying it's going to happen - but if it did, it would be a great time to get in," he said.

"Buy the convertible of a company that you like - select wisely - then hold it until it reaches 130 to 140, the level at which the natural features of the bond no longer work well, then sell it. It's that simple," Feingold says, aiming to cut away the complexity and provide a road map for making investments more "meaningful than finding a cool ticker."

The book is more akin to Michael Lewis' Liar's Poker than to Nick Calamos' Convertible Arbitrage. But it's no more a biography than it is a mathematical treatise. The book is intentionally engaging for the purpose of drawing out for investors the hard and fast realities of convertibles, i.e. "there are no bad bonds, only bad prices," and this appeal is sure to spill over to existing convert folks as well.

The book recounts the stories around recent market movers including Molycorp Inc. and Clearwire Corp., for example, and the Forward alone reads like a Who's Who of the convertibles world.

Beating the Indexes builds on some of the ideas that Feingold first delved into in his first book, The Undoing of Cowardice, which he self-published in 2009.

Undoing is also good reading, by the way, laying out Feingold's tenets about Wall Street and how the herd mentality hurts investors greatly and has hurt convertibles investors perhaps even more greatly.

Currently Feingold is a salesman covering a small number of accounts for BTIG LLC in New York. Previously he has managed convertibles at Goldman Sachs; served as senior partner and co-manager of the FrontPoint Convertible Arbitrage Fund; and co-managed the Clinton Riverside Convertible Fund.

At BTIG, Feingold said his reason for being is to attempt to build bridges between the existing equity franchise, focused on small and mid-cap companies, and the convertibles side of the business.

He believes he can get better information to outright investors and perhaps get the firms' stock equity clients to seize on opportunities in convertibles.

He admits that promoting the better risk/reward profile of convertibles to the stock is a hard sell, but he believes his message and presents a compelling argument.

Helping translate the firm's liquidity in convertible-related equities into better prices for its convertible customers, and bringing opportunities in convertibles to accounts traditionally focused on stocks, is a worthy goal, he says.

And it's a goal from which the convertibles market will only benefit with his success.

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