Convertible arbitrage strategies fell 35.83 percent in the first 11 months of last year, twice the decline of the average hedge fund and barely better than the Standard & Poor’s 500 index’s 38.08 percent drop. Despite enormous challenges — the credit crisis, the inability to short certain equities, investor redemptions — convertible arbitrage managers who held their high-quality bonds through the September and October sell-offs looked good in November. Convertible arbitrage managers exploit pricing discrepancies between a company’s convertible bonds and its stock.
“We concentrated our book in what we viewed as the cream of the crop,” says David Van Blerkom, marketing director for $650 million Manhattan Beach, California–based Inflective Asset Management. The firm’s $130 million offshore Inflective Convertible Opportunity Fund I returned 7.65 percent in November, helped by its position in drug and medical-device maker Allergan.
Recent declines in the value of convertible securities have created an opportunity, says Shawn Bergerson, founder and portfolio manager of $800 million Waterstone Capital Management, based in Plymouth, Minnesota. Its sole fund, Waterstone Market Neutral Master Fund, was up 3.08 percent in November.
“To drive returns,” Bergerson says, “we bought more of the high-quality names that were a potential catalyst in the near term.” Buying convertible bonds in Countrywide Financial Corp. and shorting those of Citigroup also helped.
