These days, convertible arbitrage managers can barely complete the first line of their pitch without investors heading for the door. The solid returns the strategy offered have faded as a result of capacity issues, the sharp decline in global volatility and fewer opportunities. But Axis Capital has managed to retain investors by finding a new niche within the strategy – Asia.
"It's questionable whether convertible arbitrage in its true sense exists any more," says George Philips, CIO at Axis Capital. "Buying converts, hedging away all risks and trading volatility is not going to cut the mustard, and why should it? In the US and Europe there are no barriers to entry left – you can borrow shares for next to nothing, hedge any kind of credit risk and there is all the capital in the world to throw at the trade. On the whole, these funds are buying volatility at the right price. Everyone out there now has evolved and chosen their own course of exploiting the arbitrage opportunities – most rely on skewing market bets. The rules of the game are different now."
As a result Philips moved the funds' geographical focus.