The explosive growth of arbitrage funds could cause a bubble in European equity-linked valuations if new issuance cannot keep pace, according to experts in the convertibles market.

The critical state of the market, which is now dominated by hedge funds, will place a premium on the future execution of new issues. The assets under management by these funds have grown 60% this year. This means that even though new issuance globally is up between 30% and 40%, there is a danger of the prices of equity-linked bonds being pushed up artificially, creating a bubble.