After a brutal year, the convertible bond market has recently shown signs of life. But backbreaking losses at a handful of hedge funds demonstrate that trading these security hybrids is not for the faint of heart. The latest example is Arbitex, a Dallas-based convertible fund run by Arbitex Asset Management. According to performance documents obtained by TheStreet.com, assets at the Arbitex Master Fund have plunged from $517 million in January to just $30 million at the end of August. The 94% hammering shows what happens when a hedge fund fails to perform. Arbitex Master's investment return for the year to date is -13.2%. According to someone familiar with the situation, the rest of the shrinkage -- $420 million worth -- comes from investors pulling their money out. An industry analyst says that the fund has not posted its September results yet. A call to Ken Tananbaum, Arbitex's founder, was not returned. "He is a great guy, very smart," says a fund-of-funds executive of Tananbaum. "But the strategy got broken." What hurt Arbitex is its so-called "volatility bias." As with most convertible arbitrage trades, volatility players buy convertible bonds and short the common stock of the companies issuing them. Unfortunately, Arbitex Master's strategy depended on fairly big price swings to make money. In this year's sideways market, the strategy was a loser. According to Justin Dew, a Standard & Poor's hedge fund analyst, the S&P 500 is down 2.79% so far this year, while the CBOE Market Volatility Index, or VIX, has crept up just 5%, from 14.08 on Jan. 3 to 15.33 as of Tuesday. "This fund is going to shut down before year-end," predicts one hedge fund analyst, citing, among other things, its managers' virtually nonexistent chances of ever collecting a fee from investors.