This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Q&A: Convertible Bond Arbitrage's Comeback

Convertible bond arbitrage is an old and popular hedge fund strategy that involves buying bonds that can be converted into equity while shorting the underlying stock. For many years, the strategy enabled managers to generate decent and steady returns, adjusting their hedge between long and short positions and making money in up and down markets. That easy trade came to an end by the end of 2004, when the space became crowded with hedge funds chasing a limited supply of deals.

The downturn in convertibles culminated in the spring of 2005 when Kirk Kerkorian surprised the market by buying a huge number of General Motors (GM) shares, causing losses for a great number of arbitragers who were short the stock. The result? Almost every convertible-bond arbitrage fund lost money, a great number of shops closed down, including Marin Capital, and funds of funds significantly reduced their allocation to the sector.

Since late last year, though, the strategy has slowly begun to normalize and return to its historic patterns. New deals have started to flow, and hedge funds that remained in business are posting profits again. In April, the HFRI Convertible Arbitrage Index was up 5.34%, a big change from the negative 2.64% return posted in the same month a year ago.

At this point in the cycle, it's interesting to look back and ask some of the survivors about what went wrong and what they expect looking forward. Eric Hage, founder of Cooperstown, N.Y.-based Mohican Financial Management, is one of those rare convertible-focused hedge fund managers whose returns were not down last year -- he generated returns of 1% after fees in the period. For the past 11 months, through April, his fund was up 14.2%, and it is up 6.8% year to date through April. In an interview with, Hage explained why convertible arbitrage makes sense again.

1 of 4

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,891.88 +87.08 0.49%
S&P 500 2,070.43 -0.22 -0.01%
NASDAQ 4,767.6210 +2.2410 0.05%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs