Hi,
Word on the street is that with a spur in new issuance this year, convertible arb has come back from a long slumber of poor performances over the past decade. The last time the strategy performed this well was after the post recession period of 2007/8...
I work in the event driven space but have never done much with convert arb, but interested. Wondering if anyone can point me to any good resources/book on the subject? (beyond just arbing ITM converts)
There is also this book here (https://www.amazon.com/Convertible-Arbitrage-Insi…). wondering if this is the best place to start or might there be any other good/resources?
Thanks very much,
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I work in the space, happy to answer questions to the extent I can though my experience is more on the research than the trade construction side where the real arb skillset comes in. Here's a good place to start though: https://www.rwcpartners.com/wp-content/uploads/2019/06/rwc-convertible-…
Thanks so much! I'll be digesting the pdf you listed here and get back to you if I have any questions. Stay safe!
hey any chance you have any updates re what to read up on? have become interested in convert arb but link seems to not be working anymore
Used to trade it. There are some other posts from years ago I think. Calamos is the industry standard. Big thing about converts is you need positive interest rates and that’s only been a relatively recent phenomenon post Lehman… ie since 2022. There is another good primer put out by a dude who used to work at advent his name is Hart Woodson. That might be slightly easier to digest.
Like a lot of things in finance once you actually see how it’s done it’s pretty easy. The Greeks/exposures can move in a number of ways differently than what’s modeled and that’s often because of flows/leverage. It’s an interesting product for sure and a niche one…
What’s the best way to break into this niche domain?
Either by random chance (like I did) or knowing someone. Like a lot of asset classes it’s a very small world where everyone seemingly knows each other. Wish I could say more to help.
It’s frankly not an all weather asset class in how it trades (though it theoretically can be). It’s funky, illiquid, weird and topical at best. Unlike say, high yield/credit which is (though small enough on its own) a much bigger universe with lots of players across investor types. A lot of great investors started with or had very early and formative exposure to CBs when they were much more nascent (read: not well understood and inefficient market) since they encompass equity credit and vol, think Ken Griffin, Paul Singer, Howard Marks etc
Tough to build a stable career in it I would say. And that’s if you survive (I didn’t).
I used to work at a convertible arbitrage hedge fund. I always found that strategy so interesting. It is a shame there is so little "easily accessible" information on it
Used to be an analyst at a convert-arb fund.
Arguably the most important thing is credit analysis. If a company has solid credit you are protected against the disaster scenarios that happened in 2001/2008 where a lot of these bonds defaulted. Since converts are junior debt if you were heavily exposed to banks you could lost everything; your short will not be able to make that up.
Second most important is being able to determine the delta you should use to hedge the portfolio. There's a bunch of different platforms convert-arb traders use, though that's abit out of my paygrade. You're essentially trading volitility, hoping to capture large movements from the cheap option that you get from the convert. If the position isn't that volitile or the bond becomes busted you still get bond like returns because the equity price probably dropped for the bond to become busted. If the stock does well you get equity like returns but with less volitility than equity because you had a short on the position. The important part is determining the right amount to short for the given position and when you should cover/sell bonds.
Technical analysis is actually quite important too because it's still a volitlity based strategy.
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