Eric Hage, Portfolio Manager, Absolute Investment Advisers met with Julie Cooling, Founder & CEO, RIA Channel to discuss convertible arbitrage, opportunities in today’s market, and allocation considerations.
A convertible bond is a corporate issued debt security, typically issues an interest payment, and offers a feature to allow an investor to convert the bond into stock at or above a predetermined price. A convertible arbitrage strategy goes long on the convertible securities of a company and simultaneously shorts the same issuer’s common stock. Convertible arbitrage strategies exploit potential mis-pricing of the credit component, income component, equity component and/or volatility component of the convertible bond.
The current convertibles market has expanded rapidly over the last few years, which ultimately drives more arbitrage opportunities and supports a healthy mix of long-only and arbitrage buyers, explains Hage on the favorable convertibles market. When compared to high yield credit strategies, convertibles often trade at wider spreads, but historically have about half the default risk.
The Absolute Convertible Arbitrage Fund aims to provide strong long-term absolute returns, with minimized volatility compared to the broader market indices. The open-ended mutual fund is managed by convertible securities specialist Mohican Financial Management, and seeks to capitalize on pricing differences in a company’s convertible bonds and its common stock. The fund can be leveraged as a part of an alternative credit or fixed income allocation and is designed to provide moderate returns with relatively low volatility.
Absolute Investment Advisers was founded in 2004 to help provide investors access to unique and independent managers and to ultimately build better risk adjusted portfolios. This shop focuses on delivering active strategies in a transparent and liquid structure.
Past performance does not guarantee future results. All investing involves risk, including potential loss of principal. The value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. Short sales may be considered speculative and it may be difficult to purchase securities to meet delivery obligations. Investors should carefully consider the Fund’s investments objectives, risks, charges and expenses before investing. This and other information is in the prospectus, a copy of which may be obtained by calling (888) 992-2765 or visiting the Fund’s web site: www.absoluteadvisers.com. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, distributor