Convertible arbitrage, which seeks to profit from pricing discrepancies between convertible bonds and their underlying shares, has returned almost 6% through July — putting it among the top-performing hedge fund trades in the first seven months of the year, according a Hedge Fund Research index which tracks 120 funds with combined assets of $84 billion, reported by Bloomberg News. Inflows into the strategy, meanwhile, are on track for their biggest annual jump in 18 years.
For traders whose playbooks involve buying converts and shorting the stock to exploit the shares’ volatility, it’s “a perfect environment” for reaping gains, said Danilo Rippa, head of multi-strategy credit and convertibles within Solutions at Man Group, speaking to Bloomberg News.
Trades involving the convertibles started to take off last year among fast-money players like Man Group and AQR Capital Management, and many flocked to “refinance trades” involving convertible bonds that were issued during the Covid era and near maturity. Hedge funds bought the debt, wagering it would be repaid and rolled into new deals.
As the pool of refinance candidates has narrowed this year, investors have increasingly turned their focus to the equity option component of convertibles, trading the interplay between companies’ convertible debt and common stock, and aiming to profit from swings in the shares.