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Hedge funds up convertible arbitrage exposure

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Man Group, the world’s largest listed hedge fund, is among a number of investment firms increasing their exposure to convertible arbitrage, which seeks to capitalise on price discrepancies between a convertible bond and its underlying stock, according to a report by Bloomberg.

The report cites data from Nasdaq eVestment in revealing that convertible arbitrage attracted inflows in the first three months of the year as investors pulled billions from other strategies.

The strategy, which typically involves taking a long position on a convertible bond and a short position on the underlying stock, returned an average 4.4% in the first four months of 2024, outperforming other relative value strategies, according to Hedge Fund Research.

If the share price falls, investors profit from the short side of the trade, while if it gains to a certain level, the bond can be converted into equity on maturity. Problems only arise if refinancing concerns cause a sudden slump in the bond price.

With companies looking to extend maturities on more than $200bn of convertible bonds due in the next five years, the strategy looks set for an additional boost, as interest rates that are lower than those on conventional debt and near record stock prices attract firms to the market for the first time.

The report quotes Adam Singleton, Chief Investment Officer of the external alpha team at Man Group, in confirming that the firm is upping its exposure via said team.

In an interview with Bloomberg, Singleton said: “The refinancing process will be particularly interesting because interest rates around the world have stayed higher than firms expected.”

Some funds are already benefitting from the favourable conditions, with US-based convertible arbitrage-focused hedge fund Linden Advisors up 5.8% from the in the first four months of the year on the back of a 12% gain in 2023 of nearly 12%, according to an unnamed Bloomberg source. Meanwhile, Context Partners, which also specialises in the strategy and manages around $1.7bn of assets, is up by more than 6% as of 10 May.

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