{
  "slug": "convertible-arbitrage",
  "name": "Convertible Arbitrage",
  "aliases": [
    "Convert Arb"
  ],
  "category": "relative-value",
  "description": "A relative-value strategy that buys convertible bonds and shorts the underlying equity to isolate the bond's volatility, credit, and rate components — earning carry, capturing volatility realization, and hedging delta dynamically.",
  "investment_thesis": "Convertible bonds are structurally cheap to fair value because issuers price them to clear; the embedded option's volatility, rho, and carry can be extracted via dynamic hedging.",
  "edge_source": "Sophisticated option modeling, credit analysis of issuers, financing/borrow management, and gamma trading skill.",
  "typical_holding_period": "3 months to 3 years",
  "typical_leverage": {
    "min": 2,
    "max": 6,
    "typical": 4
  },
  "expected_volatility": {
    "min": 5,
    "max": 12,
    "unit": "annualized-pct"
  },
  "expected_sharpe": {
    "low": 0.5,
    "high": 1.5
  },
  "drawdown_profile": "Convex up, very negative skew. Catastrophic losses possible in liquidity crunches when both legs move adversely (2008).",
  "correlation_to_equities": 0.2,
  "correlation_to_bonds": 0.3,
  "liquidity_profile": "quarterly",
  "instruments_used": [
    "convertible bonds",
    "common stock",
    "credit default swaps",
    "stock-borrow"
  ],
  "asset_classes": [
    "credit",
    "equities",
    "derivatives"
  ],
  "primary_risks": [
    "liquidity crunches",
    "credit-spread blowouts",
    "stock-borrow recall",
    "model risk on volatility"
  ],
  "macro_regime_sensitivity": {
    "rising_rates": "Negative for duration component, positive for new-issue supply",
    "falling_rates": "Positive duration tailwind",
    "high_volatility": "Positive for volatility realization, negative for liquidity",
    "low_volatility": "Difficult environment; thin returns",
    "recession": "High break risk and liquidity stress",
    "bull_market": "Healthy issuance and tightening spreads"
  },
  "fee_structure": {
    "management_fee": "1.5%-2.0%",
    "performance_fee": "20%",
    "high_water_mark": true
  },
  "key_metrics": [
    "delta-hedged P&L",
    "vega exposure",
    "credit duration",
    "implied vs realized vol"
  ],
  "notable_practitioners": [
    "Citadel (early)",
    "Highbridge",
    "Aristeia"
  ],
  "exemplar_funds": [
    "citadel",
    "aristeia"
  ],
  "related_terms": [
    "convertible-bond",
    "delta-hedging",
    "gamma-trading",
    "implied-volatility",
    "credit-spread"
  ],
  "related_strategies": [
    "volatility-arbitrage",
    "credit-arbitrage"
  ],
  "historical_drawdowns": [
    {
      "year": 2008,
      "event": "Liquidity crunch — both legs cratered",
      "estimated_drawdown_pct": -35
    },
    {
      "year": 2020,
      "event": "March COVID liquidity squeeze",
      "estimated_drawdown_pct": -10
    }
  ],
  "academic_foundations": [
    "Black-Scholes (1973)",
    "Merton (1974) credit model",
    "Mitchell, Pedersen, Pulvino — Slow-Moving Capital (2007)"
  ]
}