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Benedicte Gravrand, Opalesque London:

Whereas convertible arbitrage, a market neutral investment strategy involving the simultaneous long position in a convertible securities and the short position in the underlying stock, was among the worst performers in the hedge fund arena last year, it has experienced resurgence this year. What happened to this normally consistently low risk strategy, and what lessons can be learned from its bottoming-out?

Strategy: numbers and outlook The Hennessee Convertible Arbitrage Index is Hennessee' top performing index so far this year, returning 40.74% (to Oct-09) - compared to -24.04% in 2008. And the HFRI Fixed Income-Convertible Arbitrage Index is up 54.43% YTD, compared to -33.73% in 2008.

The convertible market now has assets of $403bn globally and more than $211bn in the US. In the first three quarters of 2009, there was $64bn in new issuance, according to Merrill Lynch Convertible Research.

Convertible bonds, bonds that can be converted into common stock, have performed strongly this year, said Goldman Sachs in their Sept-09 "Convertibles Companion" report. Their performance was almost as strong as equities as the former continued to trade up towards parity with their credit and equity option parts.

But they continue to trade at a discount to their credit and equity parts, and investors must be more selective than earlier in the year, the report goes on to say. Goldman......................

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