Experts Doubt Convertible Arbitrage Despite Strong Returns

Mar 17 2006 | 12:00am ET

The Standard & Poor’s Hedge Fund Index is up 3.16% year-to-date, led by a strong showing in its arbitrage index, which has gained 3.56% in the same period. Of the three underlying strategies in the arbitrage index, convertible arbitrage has been the strongest performer. But despite these gains, industry experts doubt that convertible arbitrage is a sustainable strategy.

“Convertible arbitrage used to be a good strategy, but people opportunistically converge into the strategy and take away all the pure arb,” said Victor Park, managing partner of Alternative Asset Investment Management. “There are some people doing creative things in private warrants off these converts as well as via secured lending type transactions, but it’s very opportunistic and very difficult to do consistently. There is no true arbitrage left, or it exists for a little bit but it dissipates quickly, and then you are left with guys making directional bets on volatility, credit or interest rates.”

Greg Dowling, senior hedge fund analyst at Fund Evaluation Group, also thinks that despite its strong showing in the first two months of the year, convertible arbitrage opportunities will be tough to come by.

“It is not the low hanging fruit that it once was where you could simply deploy the plain vanilla convert arb strategy and it would automatically go up,” Dowling said. “I think people have done well in niche investments where they were playing a little bit more of the credit side of it, or have gone overseas,” he said. “I’m not saying that there won’t be opportunities, but I just do not think that they will be long-lived unless issuance really picks up.”

According to Justin Dew, senior hedge fund strategist for Standard & Poor’s, the arbitrage sector picked up in general compared to last year because of the overall “cheapness” in the market. In his monthly report on the industry, he wrote, “Better terms for market holders to convert early and new issues carrying higher coupons are boding well for the convertible bond market.”

As for other sub-sectors, merger arbitrage is also making a strong showing, and Park is slightly more optimistic on this strategy.

“I think it is going to be a good year,” he said, adding that last year very quietly posted a strong year for M&A and this trend is expected to continue given cash rich balance sheets on the company level. “I think it is going to be a year of earnings growth through acquisition. This dynamic augurs well for merger arb and event driven strategies as well as long/short equity.” 


In Depth

Kettera Q&A: The Advantages of Alternative Investment Platforms

Oct 28 2016 | 5:52pm ET

The past several years have seen a distinct push towards easier and cheaper access...

Lifestyle

Midtown's Plaza District Fades As Manhattan Office Landscape Shifts

Nov 22 2016 | 6:32pm ET

Lower leasing costs, more efficient office space and the hope of projecting an image...

Guest Contributor

Nowhere to Hide: Why the Future of Asset Management Depends on Innovation

Nov 15 2016 | 6:55pm ET

Information technology has reshaped the asset management industry’s periphery,...

 

From the current issue of

Chicago-based independent futures brokerage and clearing firm R.J. O’Brien & Associates (RJO) has hired industry veteran Daniel Staniford as Executive Director, responsible for the firm’s institutional business development in New York and London.

AVAILABLE NOW at BARNES & NOBLE

NEWSTAND LOCATOR