When will the convertible bubble burst?

Thu May 1, 2003



The continuing success of convertible-arbitrage funds continues to confound skeptics

It's no secret that convertible-arbitrage funds have become something of a darling to hedge fund investors. Throughout the last two years they have poured a record amount of capital into this strategy, which is known for its steady returns in all forms of market conditions.

But with convertible funds flush with cash at a time when global issuance has dropped dramatically, some investors - not to mention a few managers - are wondering how much longer the party can continue.

While managers have continued to reap strong rewards in an environment of low interest rates and high volatility, there are fears for what might happen if rates start to rise and volatility subsides. Some fear that a perfect storm may be brewing which will lead to a spectacular bust.

Indeed, early last year some investors pulled money from convertible managers on the basis...

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