What is the typical strategy of most convertible arbitrage hedge funds?

What is the typical strategy of most convertible arbitrage hedge funds?

market neutral
The strategy is generally market neutral. In other words, the arbitrageur seeks to generate consistent returns with minimal volatility regardless of market direction through a combination of long and short positions in the convertible bond and underlying stock.

What is convertible bond arbitrage?

Convertible bond arbitrage is typically a delta-neutral strategy in which the investor purchases a convertible bond and simultaneously sells short the underlying stock in an amount equivalent to the theoretical equity delta of the bond (calculated using a convertible bond pricing model).

Where do hedge funds borrow shares?

Credit Lines. Investing in securities using credit lines follows a similar philosophy to trading on margin, only instead of borrowing from a broker, the hedge fund borrows from a third-party lender. Either way, it is using someone else’s money to leverage an investment with the hope of amplifying gains.

How do you convert bonds to common stock?

Convertible Bonds For example, one bond that can be converted to 20 shares of common stock has a 20-to-1 conversion ratio. The conversion ratio can also be found by taking the bond’s par value, which is generally $1,000, and dividing it by the share price.

Is convertible arbitrage fixed income?

Going back a lot further, many such “arbs” sustained big losses in the so-called “crash of ’87”. In theory, when a stock declines, the associated convertible bond will decline less, because it is protected by its value as a fixed-income instrument: it pays interest periodically.

Is convertible arbitrage a relative value strategy?

Relative value strategies seek to have little or no exposure to the underlying equity or bond markets. They tend to be market- or beta-neutral. The plain vanilla convertible arbitrage strategy involves taking a long position in a convertible bond and shorting the issuer’s stock.

What asset class is a convertible bond?

What are Convertible Bonds? Convertibles are a truly unique asset class that is often overlooked by both equity and bond investors. They share many common characteristics with traditional fixed income instruments, including a maturity date, principal repayment at maturity, a fixed coupon payment, and a credit rating.

What broker do hedge funds use?

That’s where prime brokerage enters the picture. It serves the needs of hedge funds, which can be complex. Most of the big-name investment banks serve as prime brokers. That includes Goldman Sachs, JPMorgan Chase, and Credit Suisse.

How much leverage can a hedge fund get?

It’s not unusual for a hedge fund to be leveraged between 100 and 500 percent, however, depending on the asset class. Leverage up to 10 times is not unheard of, though that would mean that a 10 percent decline in the leveraged part of the investment portfolio would wipe out investors’ equity altogether.

What is the best strategy for arbitrage trading convertible bonds?

Arbitrageurs can exploit the discount on convertible bonds while limiting exposure to unwanted risks, through the strategy of longing the convertible bond and shorting the underlying assets . To hedge the equity portion, we can short stock as the price rises, or cover additional stock if the price falls.

What are the risks associated with convertconvertible arbitrage?

Convertible Arbitrage faces the following risks –. Credit Risk: Majority of the convertible bonds can be below investment grade or not rated at all promising extraordinary returns, hence a significant default risk exists.

What are convertible bonds and how do they work?

Functionally speaking, issuing convertible bonds allow corporations to access funds quickly relative to traditional equity and debt offerings. On the other hand, investors can use convertible bonds to hedge the underlying equity, credit, and interest rate risk.

What is an option conversion arbitrage?

Conversion arbitrage is an options trading strategy employed to exploit the inefficiencies that exist in the pricing of options. more Cash-and-Carry-Arbitrage Definition