Convertible Arbitrage

The third quarter of 2020 was another period of decent returns for most asset classes, as the economic recovery from pandemic-related restrictions continued. The quarter ended on a weak note, however, as September was the worst month for global equities since March, serving as a reminder that volatility levels remain elevated. Nonetheless, the MSCI World Index added 6.29% in local currency terms in the quarter, and corporate credit also continued to perform well. Global convertible bonds fared even better, returning 9.06% in the third quarter on an outright basis, as measured by the ICE BofA Global 300 Convertible Index. Convertible arbitrage strategies were also able to capitalize on the supportive market trends, including attractive primary issuance. The HFRX Relative Value Fixed Income Convertible Arbitrage Index gained 5.57% in the third quarter.

Global convertible new issuance of $33 billion in the third quarter has taken the year-to-date total above $125 billion, the most since 2007. The U.S. market continued to be the most active, pricing $20.1 billion of deals, followed by Europe with $10.5 billion. New issue valuations remained fairly attractive for investors.

In addition to heavy convertible issuance, there has been unprecedented issuance in SPACs (special purpose acquisition companies). Through the end of the third quarter, SPAC issuance exceeded $45 billion, representing approximately half of all domestic IPO proceeds year-to-date. Although SPACs have had a mixed history, notable improvements to the terms for investors, backing from more established sponsors, and widening acceptance of the vehicles as an alternative path for mid-cap companies to go public have contributed to their improved reputation.

Due to the higher volatility environment and stronger issuance, convertible arbitrage strategies have gained 8.4% year-to-date, significantly outperforming broader hedge fund strategies. We expect volatility to remain high, with the global economic rebound facing a number of serious risks in the coming months, including a resurgence of COVID-19 cases and uncertainty regarding the potential reinstatement of pandemic-related lockdown measures, a contentious U.S. presidential election with the possibility of a disputed outcome, ongoing Brexit negotiations that may still result in a disruptive no-deal exit, and a possible delay in the EU’s coordinated fiscal response, among other issues. We are therefore confident that this environment will continue to provide ample opportunities for convertible arbitrage strategies.

For more information on Convertible Arbitrage, visit angelogordon.com/strategies/multi-strategy/arbitrage/convertible-arbitrage/

A surge in global convertible issuance has expanded the opportunity set.

SPAC issuance is at record highs.

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