Convertible Arbitrage funds attempt to exploit anomalies in prices of corporate securities that are convertible into common stock (convertible bonds, warrants and convertible preferred stock).

Convertible bonds tend to be under-priced because of market segmentation (i.e. investors discount securities that are likely to change types). Managers typically buy (or sometimes sell) these securities and then hedge part or all of the associated risks by shorting the stock. If the issuer does well, the convertible bond behaves like a stock; if the issuer does poorly, the convertible bond behaves like distressed debt.

Delta neutrality is often targeted. Over-hedging is appropriate when there is concern about default as the excess short position may partially hedge against a reduction in credit quality. As a matter of fact, an ever growing number of Convertible Arbitrage managers turn to arbitrage credit risk rather than implicit volatility.

Convertible Arbitrage is a Relative Value strategy. Hence Convertible Arbitrage funds may be used as “Risk Reducers” in portfolios.

Monthly returns201620172018
January-2.39%1.47%0.84%
February-0.02%0.72%-0.05%
March1.70%-0.02%-0.14%
April1.40%0.44%n.a.
May0.75%0.22%n.a.
June0.16%0.32%n.a.
July1.54%0.84%n.a.
August1.02%-0.12%n.a.
September0.70%0.65%n.a.
October0.27%0.60%n.a.
November0.31%0.02%n.a.
December0.90%0.25%n.a.
Annual6.47%5.52%0.64%
S&P 50011.96%21.83%-0.76%
Lehman Treasury1.04%2.31%-1.18%
Quarterly returns201620172018
1st Quarter-0.74%2.19%0.64%
2nd Quarter2.32%0.98%n.a.
3rd Quarter3.29%1.37%n.a.
4th Quarter1.49%0.87%n.a.
Annual6.47%5.52%0.64%
S&P 50011.96%21.83%-0.76%
Lehman Treasury1.04%2.31%-1.18%
Risk ProfileEdhec Convertible Arbitrage IndexS&P 500Lehman Treasury
Monthly Std Dev Ann'd6.10%14.37%4.47%
Sharpe Ratio0.290.230.04
Information ratio-0.12n.a.n.a.
Min. Monthly Return-12.37%-16.80%-4.39%
Max. Monthly Return6.11%10.93%5.31%
Mean Monthly Return0.47%0.59%0.34%
Median Monthly Return0.56%1.08%0.40%
Exc. Kurtosis19.461.371.49
Skewness-2.62-0.660.01
% of winning Months71.98%65.22%58.94%
Average Winning Return1.14%2.90%1.15%
% of losing Months28.02%34.78%41.06%
Average Losing Return-1.26%-3.75%-0.81%
Correlation AnalysisEdhec Convertible Arbitrage IndexS&P 500Lehman Treasury
S&P 5000.491.00-0.35
S&P 500 Value0.470.97-0.35
S&P 500 Growth0.480.97-0.34
S&P Mid Cap0.530.92-0.35
S&P Small Cap0.450.86-0.36
Lehman Treasury-0.18-0.351.00
Baa-Aaa0.16-0.070.05
Chg in Baa - Aaa-0.27-0.120.18
10 years - 3 Months-0.04-0.050.11
Chg in 10 years - 3 Months-0.05-0.03-0.05
VIX-0.17-0.440.27
Chg in VIX-0.38-0.660.20
in %CSFBHennesseeHFRHF NetBarclayCISDM
2006 Q216.6%16.6%16.7%16.7%16.7%16.7%
2006 Q316.6%16.6%16.7%16.8%16.8%16.6%
2006 Q416.6%16.5%16.7%16.8%16.8%16.7%
2007 Q116.6%16.6%16.7%16.7%16.8%16.6%
2007 Q216.7%16.6%16.8%16.8%16.8%16.2%
2007 Q316.7%16.6%16.8%16.9%16.9%16.1%
2007 Q416.7%16.6%16.8%16.9%16.9%16.3%
2008 Q116.6%16.5%16.7%16.8%16.8%16.6%
2008 Q216.4%16.6%16.7%16.9%16.7%16.7%
2008 Q316.4%16.5%16.4%17.1%16.8%16.8%
2008 Q416.6%16.6%16.6%16.8%16.7%16.7%
2009 Q116.5%16.5%16.7%16.9%16.8%16.6%
2009 Q216.5%16.5%16.7%16.9%16.8%16.6%
2009 Q316.5%16.4%16.8%16.9%16.7%16.7%
2009 Q416.5%16.4%16.8%16.9%16.7%16.7%
2010 Q116.5%16.4%16.8%16.9%16.7%16.7%
2010 Q216.5%16.4%16.8%16.9%16.7%16.7%
2010 Q316.5%16.4%16.8%16.9%16.7%16.7%
2010 Q416.5%16.4%16.8%16.9%16.7%16.7%
2011 Q116.5%16.4%16.8%16.9%16.7%16.7%
2011 Q216.6%16.4%16.8%16.9%16.7%16.7%
2011 Q316.6%16.4%16.8%16.9%16.7%16.7%
2011 Q416.6%16.3%16.8%17.0%16.7%16.7%
2012 Q116.5%16.4%16.7%17.0%16.5%16.9%
2012 Q216.6%16.3%16.8%16.9%16.5%16.8%
2012 Q316.6%16.6%16.7%16.9%16.7%16.6%
2012 Q416.4%16.6%16.6%16.9%16.8%16.7%
2013 Q116.5%16.5%16.6%16.9%16.8%16.6%
2013 Q216.5%16.5%16.5%16.9%16.9%16.7%
2013 Q316.3%16.4%16.6%17.0%16.9%16.7%
2013 Q416.4%16.2%16.6%17.1%17.1%16.6%
2014 Q116.4%16.1%16.6%17.1%17.2%16.6%
2014 Q216.7%15.7%16.8%17.2%17.2%16.4%
2014 Q316.6%15.5%16.9%17.3%17.3%16.4%
2014 Q418.9%n.a.20.3%20.4%20.6%19.8%
2015 Q119.3%n.a.20.0%20.3%20.7%19.7%
2015 Q218.9%n.a.19.9%20.5%20.9%19.8%
2015 Q318.6%n.a.20.3%20.3%20.7%20.1%
2015 Q418.6%n.a.20.3%20.3%20.8%20.1%
2016 Q118.5%n.a.20.5%20.3%20.9%19.8%
2016 Q218.8%n.a.20.4%20.4%20.7%19.8%
2016 Q318.9%n.a.20.4%20.4%20.7%19.6%
2016 Q419.3%n.a.20.4%20.4%20.6%19.4%
2017 Q119.3%n.a.20.5%20.5%20.7%19.1%
2017 Q219.6%n.a.20.6%20.4%20.6%18.7%
2017 Q319.7%n.a.20.5%20.5%20.6%18.7%
2017 Q419.7%n.a.20.6%20.5%20.6%18.7%
2018 Q119.3%n.a.20.7%20.5%20.6%18.9%
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