Investing Ideas

Convertible arbitrage: Offering niche alpha and diversification

Convertible arbitrage can offer asset allocators the opportunity to diversify traditional and alternative exposures, tap into idiosyncratic sources of alpha, and potentially take advantage of market volatility.

By: Mitch Livstone Sladja Carton Seth Gold
Updated: 9/12/2024
Key Takeaways
  • Convertible arbitrage is a relative value alternative investment strategy that typically has had very low equity beta and low correlation with equities and interest rates. Convertible arbitrage alpha comes from mispriced securities, due to segmented market dynamics, and unexpected stock swings that can be monetized due to the positive convexity of convertible bonds.
  • Convertible bonds are multidimensional instruments, having exposure to credit, volatility, equity and interest rates, packaged in complex and nonlinear structures. Therefore, successful implementation of a convertible arbitrage strategy requires a high level of sophistication, depth of experience, and informed analysis.
  • The convertible bond market is small compared to credit and equity markets, constraining the capacity of convertible arbitrage strategies.
  • Convertible arbitrage can be used by asset allocators to diversify traditional and alternative exposures, source idiosyncratic alpha, and take advantage of market volatility. The return profile of convertible arbitrage historically offers absolute return with low volatility and low correlation to the equity and bond markets, typically in a highly liquid format.
  • We believe the current market environment offers an especially attractive risk reward opportunity for convertible arbitrage driven by more active primary issuance, increased participation of arbitrage investors in the market and higher activity of corporate events.
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Convertible Arbitrage: Offering Niche Alpha and Diversification
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