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From Kirsten Bischoff, Opalesque New York:

While hedge funds are enjoying positive performance in the first half of 2009, convertible arbitrage is basking in the glow of investor attention after posting the strongest gains. The strategy gained has gained +29.85% YTD after being decimated last year at -33.7%, according to HFRI. But the new found attention spurred by outperformance in 2009 may be one danger that could weaken returns.

For firms such as New York-based Mohican Financial Management (website), the losses sustained in the asset class during 2008, which drove investors away and culled the number of managers, has set up surviving hedge funds with the opportunity to take advantage of a cleaner, less crowded marketplace. Less hedge fund players are translating directly into stronger pricing and performance gains.

“As of March 31, 2009, assets in hedge funds dedicated to convertible arbitrage were about half of what they were a year earlier and at the lowest level in nearly a decade,” said the firm in a published outlook piece earlier this year.

Mohican has tracked well with its peers, returning +30% YTD, after preserving capital against its indices but still declining -19.12% in 2008. In a letter to investors, the managers said they have expectations for the convertible arbitrage space to a “return to the mid-90’s when the market was far less dominated by hedge funds and small/mi......................

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