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What drives the performance of convertible-bond funds?

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  • Ammann, Manuel
  • Kind, Axel
  • Seiz, Ralf

Abstract

This paper examines the performance of US mutual funds that invest primarily in convertible bonds. Multivariate cross-sectional analyses show a significant relation between a fund's performance and its asset composition: the higher the difference in the percentage of assets invested in convertible bonds compared to the percentage invested in stocks, the higher the performance, on average. We show that this result can be explained by factors associated with investment opportunities in the convertible-bond market and trading strategies related to convertible arbitrage, as typically performed by hedge funds. Overall, convertible-bond fund performance measured by alpha is comparable to a passive investment in stocks, bonds, and convertible bonds. This performance is the result of weak selection skills and successful timing strategies related to convertible arbitrage.

Suggested Citation

  • Ammann, Manuel & Kind, Axel & Seiz, Ralf, 2010. "What drives the performance of convertible-bond funds?," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2600-2613, November.
    • Handle: RePEc:eee:jbfina:v:34:y:2010:i:11:p:2600-2613
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    Cited by:

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    2. Konstantinov, Gueorgui S. & Fabozzi, Frank J., 2021. "Towards a dead end? EMU bond market exposure and manager performance," Journal of International Money and Finance, Elsevier, vol. 116(C).
    3. Braun, Alexander & Ben Ammar, Semir & Eling, Martin, 2019. "Asset pricing and extreme event risk: Common factors in ILS fund returns," Journal of Banking & Finance, Elsevier, vol. 102(C), pages 59-78.
    4. Keith Cuthbertson & Simon Hayley & Dirk Nitzsche, 2016. "Market and Style Timing: German Equity and Bond Funds," European Financial Management, European Financial Management Association, vol. 22(4), pages 667-696, September.
    5. Grose, Chris & Dasilas, Apostolos & Alexakis, Christos, 2014. "Performance persistence in fixed interest funds: With an eye on the post-debt crisis period," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 155-182.
    6. Herrmann, Ulf & Scholz, Hendrik, 2013. "Short-term persistence in hybrid mutual fund performance: The role of style-shifting abilities," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2314-2328.
    7. Zura Kakushadze & Juan Andrés Serur, 2018. "151 Trading Strategies," Springer Books, Springer, number 978-3-030-02792-6, November.
    8. Jonathan A. Batten & Karren Lee-Hwei Khaw & Martin R. Young, 2014. "Convertible Bond Pricing Models," Journal of Economic Surveys, Wiley Blackwell, vol. 28(5), pages 775-803, December.
    9. Chen, Honghui & Nguyen, Hoang Huy & Singal, Vijay, 2011. "The information content of stock splits," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2454-2467, September.
    10. Dutordoir, Marie & Lewis, Craig & Seward, James & Veld, Chris, 2014. "What we do and do not know about convertible bond financing," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 3-20.
    11. Kelvin Jui Keng Tan & Jia Min Lee & Robert W. Faff & Kathy Walsh, 2016. "Short-selling pressure and last-resort debt finance: evidence from 144A high-yield risk-adjusted debt," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 56(4), pages 1149-1185, December.
    12. Marle, Mats van & Verwijmeren, Patrick, 2017. "The long and the short of convertible arbitrage: An empirical examination of arbitrageurs’ holding periods," Journal of Empirical Finance, Elsevier, vol. 44(C), pages 237-249.
    13. Badrinath, S.G. & Gubellini, S., 2011. "On the characteristics and performance of long-short, market-neutral and bear mutual funds," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1762-1776, July.

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