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From Sagar Chakraverty, Opalesque Asia:
After the 2008 crisis investors are quite averse to putting their money into any strategy or vehicles that are difficult to understand. The global macro and the equity long/short strategies are clearly the current favorites owing to their simplicity. Investors are quite averse to various market neutral investment strategies such as convertible arbitrage and fixed income arbitrage (FIA) – which they perceive as complicated.
However, these so-called complicated strategies are performing well in 2010 according to the Eurekahedge Hedge Fund Index. While the “simple” strategy indices are down YTD – the Macro Index down 0.4%, the Long / Short Equities Index down 0.69%, and the Multi-Strategy Index down 0.1%, the complicated strategy index such as the Arbitrage Index is up 1.09%YTD.
Convert-arb strategy was the best performer in 2009
When a company’s convertible bonds are priced inefficiently relative to the company’s stock, convertible arbitrage attempts to profit from this pricing error.
Hedge funds will buy a company’s convertible bonds and short the company’s stock simultaneously. If the company’s stock price falls, they benefit from its short position but if the stock price rises, the convertible bonds can be converted into stocks, and sell-off at the market value, benefiting from its long position and compensating for any losses on its short position.
This strategy was the top performer in 20...................... To view our full article Click here
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