What is Convertible Arbitrage?

Convertible arbitrage has historically used a market-neutral strategy to seek moderate returns with low risk. If you’re looking for investments that target moderate growth while preserving capital, convertible arbitrage may have a place within your portfolio.

How Does Convertible Arbitrage Investing Work?

Convertible arbitrage simultaneously trades two different — but related — assets.

A company’s convertible bond is purchased, thus initiating a long position. The bond should provide some regular returns, and have an option to convert the bond into equity/stock at a later time.

The company’s stocks shorted at the same time, primarily as a hedge against the bond position. The short stock position can negate equity sensitivity that’s inherent in the convertible bond position.

When managed properly, the long/short strategy may provide returns through the bond’s implied credit spread narrowing, the assets’ volatility increasing, regular payments received from the bond, and/or the short stock position gaining value.

How Risky is Convertible Arbitrage Investing?

Convertible arbitrage investing may act as a hedge against risk, because there is potential to make money in multiple scenarios:

  • Stock Price Decreases: The short position of the common stock may gain value. Any decrease in the convertible bond’s value is capped because the bond has a fixed income source (payments).
  • Stock Price Increases: The convertible bond may increase in value. Although the short position will likely lose value, that may be partially or fully offset by the bond’s increase. Regular payments are still made.
  • Stock Price Doesn’t Change: Regular payments provide fixed returns. These may help offset any costs associated with borrowing the shorted stock

The combination of positions allows for moderate return potential while maintaining positions that have low volatility and low beta (when compared to other asset classes).

Are Convertible Arbitrage Funds Actively Managed?

The short stock position must be continuously managed, as it gets adjusted based on the stock’s price. Convertible arbitrage funds thus need skilled managers.

What is the Absolute Convertible Arbitrage Fund?

The Absolute Convertible Arbitrage Fund (ARBIX) was started in 2002, and converted into its current mutual fund structure in 2017. The fund has a 20-year history of focusing only on convertible arbitrage. A balanced approach is used when assessing arbitrage opportunities due to mispricings in convertibles.

To learn more about the Absolute Convertible Arbitrage Fund and if it could have a role in your portfolio, get in touch with a knowledgeable representative.

*Beta is is the measure of a fund’s relative volatility as compared to the S&P 500 Index which by definition is 1.00. Accordingly, a fund with a 1.10 beta is expected to perform 10% better than the Index in up markets and 10% worse in down markets.

Asset allocation decisions may not always be correct and may adversely affect Fund performance. The value of certain convertible securities may be influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on a convertible security’s investment value. Debt securities have interest rate, inflation and credit risks and individually, may be subject to prepayment and default risk. High yield and junk securities involve greater risk and tend to be more sensitive to economic conditions and credit risk.

Investors should carefully consider the Fund’s investments objectives, risks, charges and expenses before investing. This and other information is in the prospectus which you can see by clicking here. Please read the prospectus carefully before you invest.

Foreside Fund Services, LLC, distributor