Convertible arbitrage hedge funds have produced lower but less volatile monthly returns than equity and fixed-income indexes this year. Year to date, the HFRI Relative Value: Fixed Income-Convertible Arbitrage index had a 1.6% return after January's 1.8% gain and losses of 0.1% in both February and March.
Convertible arbitrage strategies produce higher risk-adjusted returns
Over the 10 years ended March 31, the convertible arbitrage index had a 5% annualized return with 4.4% volatility. The risk-adjusted return, measured by the Sharpe ratio, was higher than the S&P 500, Russell 2000, Bloomberg U.S. Aggregate Bond and Bloomberg U.S. Corporate High Yield Bond indexes.
In 2022, the convertible arbitrage strategy lost 1%, much lower than equity and fixed-income indexes. The S&P 500 index lost 18.1%, while the Bloomberg U.S. Aggregate Bond index returned -13%.