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Hedge funds: Have convertible arbs bottomed out?

Signs of a revival of investor interest in convertible arbitrage hedge fund strategies as funds spot opportunities in a depressed market

Haywood: market now quite
appealing for convertible plays

Hedge funds that invest in convertible bonds have posted their worst performance ever during the first five months of this year, but it could be the right time to get back into the market. According to Hedge Fund Research, convertible arbitrage funds fell 6.73% on average in 2005 to the end of May. Tremont Capital estimates that in the first quarter of the year, investors withdrew about $1.8 billion from the strategies.

In addition in June a handful of managers admitted defeat. California-based Marin Capital, a convertible bond fund that at one time ran $1.7 billion, said it would be returning money to investors because performance was being pushed down by too many investors with the same strategy. At the same time, GLG has also had two of its convertible bond arbitrage vehicles come under the spotlight. GLG's market neutral fund fell 9% in May and has slumped 15% so far this year. Its credit fund fell 14.5% in May and is down 15.5% this year.

The withdrawal of money, combined with the market environment, could mean that those funds that hung on in have a chance of making higher returns.

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