Inserting Convertible Arbitrage Funds in a Classical Portfolio: An Empirical Assessment

HEDGE FUNDS STRATEGIES: RISK ASSESSMENT AND RETURNS, Beard Books, Washington, 2004

Posted: 20 Jul 2005

See all articles by Daniel P.J. Capocci

Daniel P.J. Capocci

HEC - Université de Liège; Architas Multi-Management Ltd; Luxembourg School of Finance; Edhec Risk and Management Research Center

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Abstract

This study precisely analyses how the insertion of convertible arbitrage funds into a classical portfolio of stocks and bonds impacts the distribution of returns. We demonstrate that although convertible arbitrage funds are attractive in mean-variance terms, results are more controversial when skewness and kurtosis are taken into account. The efficient frontier analysis will overestimate the benefits from including convertible arbitrage funds in an investment portfolio because it does not take into account the lower skewness and the higher kurtosis that is obtained in most cases when convertible arbitrage funds are included. We also set out that portfolios of two funds allow the investor to attain a better efficient frontier compared to single funds or to portfolios containing more than two funds. Finally, we analysed the proportion of hedge funds to allocate to the portfolio. Our analysis indicates that a high allocation of the portfolio to convertible arbitrage funds allows the investor to obtain interesting returns both in terms of mean-variance analysis and in terms of skewness and kurtosis.

Keywords: convertible arbitrage, convertible bonds, empirical analysis, portfolio analysis, diversification

JEL Classification: G11, G12, G19

Suggested Citation

Capocci, PhD - CAIA, Daniel P.J. and Capocci, PhD - CAIA, Daniel P.J., Inserting Convertible Arbitrage Funds in a Classical Portfolio: An Empirical Assessment. HEDGE FUNDS STRATEGIES: RISK ASSESSMENT AND RETURNS, Beard Books, Washington, 2004, Available at SSRN: https://ssrn.com/abstract=758392

Daniel P.J. Capocci, PhD - CAIA (Contact Author)

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