Convertible Arbitrage Performing Well
Convertible arbitrage has been one of the best performing strategies in 2009 after being one of the worst in 2008. A relative-value strategy, convertible arbitrage combines a long position on a convertible security with a short position on its converting stock. Due to distressed convertible security prices early in the year and the subsequent rebounding stock market, this strategy has been a boon to investors that risked investing in unstable equity and bond markets a year ago. According to the HFRX Convertible Arbitrage Index, at the end of September, the strategy was up 37.27 percent year to date. Aside from the rally in HFRX emerging-markets indices for Brazil, Russia, India, and China, convertible arbitrage is the best performing strategy year to date.
However, BHA data show that among hedge fund investors, convertible arbitrage has not been as popular a strategy as one would think. Considering how poorly the strategy performed last year when equity markets were tanking, it is quite surprising to discover that the strategy was more popular one year ago than it is today among investors profiled by BHA. During the past quarter, only 100 active hedge fund investors across the globe expressed interest in convertible arbitrage funds. This is lower than the number of investors that expressed interest in other core hedge fund strategies, such as CTAs, long/short equity, global macro, credit, and distressed.
Typically, investor interest tends to lag performance reports. In fact, investors can sometimes be six to twelve months behind when it comes to investing in top performing funds and capturing the gains. BHA will continue to monitor interest to see if investors allocate part of their hedge fund portfolios to convertible arbitrage while the market continues to accelerate.