The burgeoning global mergers and acquisitions market is helping revive convertible arbitrage, though hedge funds are still a bit gun shy as they devote fewer assets to the strategy. The Wall Street Journal reports that the $31 billion in convertible bonds issued this year represents more than a 50% jump from 2005 and the largest amount in two years, and that’s translating into healthy returns for hedge funds. According to Hedge Fund Research, convertible arb was up 5% in the first quarter after living as a celler dweller for the past year and watching hedge funds flee from it or cut back. At one point in the not too distant past, hedge funds accounted for 75% of all convertibles trading, says the Journal, but last year it was down to less than 50%. Among firms, Highbridge Capital Management has slashed its money in convertible arb from 42% of its $9 billion AUM to 20%, and Goldman Sachs’ exposure to the strategy has sunk from 25% in 2003 to 3% today. Whether the latest boost will have HF players changing course again remains to be seen.
