The Start of the Come Back for Convertible Arbitrage?

Stephen Harris

11 July 2005

Convertible bond arbitrage hedge funds posted positive monthly returns in June, the first time this year, according to new research by Goldman Sachs. The Goldman’s US Convertible Hedge Fund Index recorded a preliminary gain of 1 per cent in June although for the first half of the year, the index is down 7.7 per cent. It is the worst performing hedge fund strategy this year, and the poor performance has caused some large convertible arbitrage hedge funds to close including San Francisco-based Marin Capital Partners, which had $2.2 billion in assets at its peak, and Alta Partners, run by San Francisco-based Creedon Keller & Partners, which had about $1.2 billion. Although market sentiment on convertibles is still mixed, valuations for these bonds are getting higher. Hedge fund managers are now the majority of buyers of convertible bonds, which also contributes to the problems. The poor performance in the sector has led to increased redemption requests which forced managers to sell into a market with no buyers, thus driving returns even lower.