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The Resurgence of Convertible Arbitrage

by Amy Bensted

  • 10 Aug 2009
  • HF

Despite a strong start, 2008 proved to be an annus horribilis for convertible arbitrage, with short selling bans, the nationalization of Fannie Mae and Freddie Mac and the bankruptcy of Lehman Brothers all contributing to certain hedge fund managers losing six years of performance returns in six months over the latter half of the year. 2009, however, has marked a rally in the convertibles sector and some good investment opportunities have started appearing.

2008 saw a huge contraction in the number of hedge fund managers running convertible arbitrage strategies, but, with fewer managers chasing these opportunities, many investors are seeing convertible arbitrage as a smart option, encouraged by the solid returns that these funds have been producing over the first half of 2009.

The current interest in convertible arbitrage funds is dominated by funds of hedge funds (FoHFs) in both North America and Europe. FoHFs are well equipped to react to the rapidly changing economic landscape and convertible arbitrage funds have proved to be a good means of generating solid returns during 2009; consequently, fund of funds are increasingly inclined to add these hedge fund managers to their portfolios.

Providing convertible arbitrage continues to post consistent returns, and institutional confidence begins to pick up, we at Preqin predict that other groups of institutional investors will begin to invest greater sums of capital into such funds and convertible arbitrage managers will pick up new mandates.

Preqin currently holds profiles for 141 investors with an active interest in convertible arbitrage hedge funds, including 68 North America-based, 54 Europe-based and 19 Asia and Rest of World-based institutions. To find out more and register for a free trial of Preqin’s Hedge Investor Profiles, please click here.

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