September 2021

What is an Unlevered Hedged Convertible Arbitrage allocation? An Unlevered Hedged Convertible allocation is a conservative version of Convertible Arbitrage. The investment objective of this strategy is to provide enhanced income and a diversifying return, while still significantly reducing portfolio volatility. The strategy delivers high interest income available on convertible securities, while hedging the equity risk by taking a short position in the same company’s underlying common stock. The opportunity set also includes gains through inefficiencies that exist in the marketplace and an increase in volatility in the market activity.

The unprecedented combination of artificially low, central bank manipulated treasury bond yields with elevated inflation presents investors with a serious challenge. When investors earn a rate of interest that is substantially below the rate of price increases in the economy, they lose purchasing power. The loss of purchasing power is very different than periodic corrections in equity prices. An investor with a diversified equity portfolio incurring a 10% portfolio loss often experiences a recovery when conditions improve and market confidence comes back. The net effect on an equity portfolio is that the annualized return, through the correction and recovery periods, will be positive and often in line with long term returns.