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Convertible Arbitrage Hedge Funds

by Amy Bensted

  • 08 Nov 2010
  • HF

Strategy in Focus: Investors in Convertible Arbitrage Funds

According to Preqin’s Hedge Fund Investor Profiles database, 179 institutional investors have an active appetite for convertible arbitrage strategies. In comparison to other strategies, convertible arbitrage funds performed strongly in 2009, despite the turbulence of the previous year. However, in 2010, there has been a decrease in the level of interest in this strategy from institutional investors. In 2009, 9.2% of the institutional investors on Preqin’s database stated a preference for this strategy, but this has dropped to around 7% today. Investors are currently wary of investment in illiquid assets, which has led to a decline in the popularity of longer-term strategies such as convertible arbitrage hedge funds.

The typical size of an institutional investor with a preference for convertible arbitrage funds is $1.5 billion and the average allocation to hedge funds is 13.2%. Investors in convertible arbitrage funds are seeking returns of 8.2% from their investments on average.

45% of hedge fund investors interest in convertible arbitrage funds are from North America and 42% are from Europe. Funds of hedge funds are by far the largest source of capital for this strategy, accounting for 64% of investors with an active interest in convertible arbitrage. Funds of hedge funds are more adaptable, highly diversified and well equipped to handle the illiquid nature of convertible arbitrage strategies, which typically have an average lock-up of 20.6 months.

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