September 25, 2023 05:00 AM
Graphic: Convertible arb funds provide steady returns
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Hedge funds employ convertible arbitrage strategies to profit from the mispricing between a convertible bond and the underlying stock. Historically, they have provided steadier returns; for example, in 2022's challenging environment convertible arb funds lost just 1%. In fact, convertible arbitrage funds have provided lower volatility and better risk-adjusted returns than other hedge fund strategies over the past decade.
Strategy comparison: Over the last year through the end of August, the HFRI RV: Fixed Income Convertible Arbitrage index returned 8.9% with a standard deviation of 3.4%. That was the best risk-adjusted return vs. other broad hedge fund categories, and the lowest volatility vs. the equity hedge, event-driven and macro indexes. From the start of 2013 through Aug. 31, it returned an annualized 5.2% with a standard deviation of 4.3%. The convertible arbitrage index’s return trailed only the equity hedge index, and it had the lowest volatility among other hedge fund categories.
Monthly index returns since September 2022

Annual index returns since 2013

Market rebounds: After a strong 2020 and 2021, issuances cooled in 2022. But the pace has picked up in 2023, totaling $35.1 billion through Aug. 31. The size of the U.S. market, important for liquidity and opportunity, was $234 billion, down from $238 billion at the end of 2022 and $344 billion in 2020.
U.S. convertible issuance and size of market (billions)

*Through Aug. 31. Sources: HFR, Bloomberg LP, Calamos Investments