Risks in Hedge Fund Strategies: Case of Convertible Arbitrage

Topics:
Investment and Capital Markets
Tags:
Arbitrage,
Financial Services,
Hedge Fund
Source:
Financial Management Association International

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Overview: Using data on Japanese and US convertible bonds and underlying stocks, it analyzes the risk return characteristics of convertible arbitrage funds. The hypothesize that there are three primitive trading strategies that explain convertible arbitrage funds, returns, positive carry, volatility arbitrage, and credit arbitrage. They are referred as asset-based style factors. ABS factor returns are constructed using sample of Japanese and US convertible bonds. As hedge fund strategies are generally opaque to investors, the explicit identification of ABS factors using only observable market prices helps to explain the risk structure of convertible arbitrage hedge funds beyond sample-dependent ex-post statistical results. This paper is in the spirit of this stream of research. The objective of this paper is to characterize the risk-return characteristics of convertible arbitrage hedge funds.

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Format: PDF | Size: 266KB | Date: Sep 2004 | Pages: 40

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