Innovative Convertible Arbitrage Fund Disrupts Traditional Investment Approaches

10 Jun 2024 - Press

Solken Convertible Arbitrage's New Strategy Marries Systematic Analysis with a Classic Arbitrage Model

Solken Convertible Arbitrage, a Luxembourg SICAV launched in late 2022, introduces a fresh approach to convertible bond arbitrage by integrating systematic strategies with traditional investment practices. Spearheaded by Alexis Martin and Romain Cosandey, two experienced managers with quantitative expertise, this fund capitalizes on a hybrid model that leverages both data-driven signals and hands-on trading. Amid rising volatility and increased convertible bond issuances, this fund aims to deliver uncorrelated returns and a modernized perspective on a well-established hedge fund strategy.

In the ever-evolving landscape of hedge fund strategies, the recent emergence of Solken Convertible Arbitrage, a Luxembourg SICAV fund, marks a significant shift in convertible bond arbitrage. This fund, which began live trading in early 2023, aims to revitalize one of the hedge fund industry’s oldest strategies by adding a systematic overlay to what has traditionally been a discretionary model.

A Systematic Twist on Classic Arbitrage

Convertible bond arbitrage relies on a balanced approach that involves long and short positions in a convertible bond and its corresponding stock. The method seeks to achieve profit through a careful hedging balance, ideally rendering it indifferent to market direction. Traditionally, this strategy involves calculating the convertible bond’s theoretical price and employing an analysis of the company fundamentals, assessing its business, management, and market potential.

The founders, Alexis Martin and Romain Cosandey, bring a wealth of experience from roles in quantitative finance and portfolio management at firms like MFM Mirante Fund Management and SquarePoint Capital. Recognizing that markets from FX to equities are now more quantitative-driven, Martin and Cosandey see an opportunity to bring similar rigor to convertible bonds, where traditional, manual trading practices still dominate. “We aim to be at the forefront of introducing systematic methods to convertible bond management,” says Martin, highlighting their focus on data collection, signal development, and portfolio construction.

Performance and Market Adaptation

Since inception, Solken Convertible Arbitrage has demonstrated resilience and adaptability. By April 2024, it reported a 9.8% return with a controlled 2% volatility rate, showcasing its ability to yield steady, uncorrelated returns amid fluctuating markets. The fund’s strategy has proved its mettle during recent economic shifts, capitalizing on the revival of convertible arbitrage, which saw a 20% performance spike in 2020. Solken’s approach leverages this revival while emphasizing risk mitigation, especially crucial during periods of aggressive interest rate hikes and widening credit spreads.

An Evolving Strategy and the Road Ahead

Despite the limitations of trading convertible bonds electronically, Solken’s systematic approach positions it for future advancements as markets continue to digitize. Martin and Cosandey maintain a research-driven approach, continuously evolving their models and methodologies. “Trading may remain manual for now,” remarks Martin, “but if the landscape changes, we’ll be ready to adapt.”

The fund anticipates several macroeconomic drivers in the coming years that may offer further opportunities. Higher volatility, driven by sustained interest rate levels, is a potential boon for this long-volatility strategy. Additionally, with current high rates, corporations may favor issuing convertible bonds over high-yield debt, creating new arbitrage opportunities as companies seek cost-effective financing options.

Conclusion

Solken Convertible Arbitrage exemplifies a bold evolution in convertible bond investing by combining the stability of a classic hedge fund strategy with modern, quantitative enhancements. Through its innovative approach, Solken not only seeks to offer investors steady, uncorrelated returns but also paves the way for a more systematic, data-centric future in convertible bond arbitrage.