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Report Evaluates Rebound Of Convertible Arbitrage Funds

by Phillip Morton, Investors Offshore.com

21 May 2009

Credit Suisse/Tremont Hedge Fund Index has released a new research report, Convertible Arbitrage: Shifting Gears, which examines the reasons behind the Convertible Arbitrage meltdown in 2008 and the factors driving the strategy’s recent turnaround.

Convertible Arbitrage went from being one of the worst-performing strategies in the Credit Suisse/Tremont Hedge Fund Index in 2008, to one of the best-performing strategies in the first quarter of this year. Many believe that the fundamental and technical reasons for convertibles’ devaluation in 2008 may correct as credit markets begin to stabilize and if deleveraging continues to abate. Convertible Arbitrage: Shifting Gears discusses the strategy’s ability to generate positive returns both during the declines in equity markets in January and February, as well as during the global market rallies in March and April.

Some key findings from the Credit Suisse report include:

  • Convertible Arbitrage funds were caught in a 'perfect storm' of fundamental and technical difficulties following the fall of Lehman Brothers, resulting in a decline of 25.5% in the period from September 1 to December 31, 2008.
  • In January, convertible bond yields were atypically more attractive than straight bond yields with similar maturity and seniority in the capital structure.
  • Although yields have dropped since their highs at the end of 2008, the resurgence of new issuances as well as continued cheapening of the asset class points to Convertible Arbitrage as a strategy that may continue to rebound in 2009 if conditions in the credit markets continue to improve.
  • Volatility trading of the strategy was curtailed during the large declines in Q4 2008 and early 2009, but may come back later in the year if equity markets stabilize, albeit with a reduction in the use of leverage.
  • Convertible Arbitrage registered one of the best performances in the Broad Index for Q1 2009, returning 7.7%.

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