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Benedicte Gravrand, Opalesque London:

Yesterday's Part 1 can be found here here.

Lessons: two risk factors should stand out most The difficult events of 2008 should be highly educational for investors as to what can go wrong in convertibles, said Eric Hage, CIO of New York-based convertible funds house Mohican Financial Management, in a recent article for BarclayHedge. He explained that two risk factors should stand out most - leverage and investor commitment. The use of overly high leverage made many "convertarb" funds far too vulnerable to the effects of forced liquidation in a depressed market. The unwillingness of investors to recognize value and ride out the storm precipitated heavy short term losses, denying convertibles sufficient time to return to fair value.

The events of 2008 and 2009 should also tell investors why convertible arb, when managed prudently by an experienced manager in cooperation with committed investors, works well as an arbitrage strategy (the simultaneous purchase and sale of an asset in order to profit from a difference in the price). In general, Hage concluded, the combination of value and time wins out in the end - provided managers are prudent and investors a......................

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