问题如下:
Yankel Stein is the chief investment officer of a large charitable foundation based in the United States. Although the foundation has significant exposure to alternative investments and hedge funds, Stein proposes to increase the foundation’s exposure to relative value hedge fund strategies. As part of Stein’s due diligence on a hedge fund engaging in convertible bond arbitrage, Stein asks his investment analyst to summarize different risks associated with the strategy.
Describe how Extreme market volatility can create concerns for Stein’s proposed hedge fund strategy.
解释:
Convertible arbitrage strategies have performed best when convertible issuance is high (implying a wider choice among convertible securities as well as downward price pressure and cheaper prices), general market volatility levels are moderate, and the liquidity to trade and adjust positions is sufficient. Extreme market volatility typically implies heightened credit risks. Convertibles are naturally less-liquid securities, so convertible managers generally do not fare well during such periods. Because hedge funds have become the natural market makers for convertibles and typically face significant redemption pressures from investors during crises, the strategy may have further unattractive left-tail risk attributes during periods of market stress.
看了老师的解析: 1. convertible bond arbitrage在“moderate market volatility”的时候表现的最好,核心原因是convertible bond相当于bond+call option,如果是extreme market volatility的时候,其中bond的部分在市场向下极端波动的时候可能产生credit risk。2. 由于convertible bond的流动性不好,市场极端下滑的时候可能抛不出去。以上两点都可能导致策略失败进而引发较大的损失。 以上两点都是在市场极端波动情况下,那么需不需要说市场平稳情况下,convertible bond arbitrage也不好?