Core Viewpoint - The article presents a long-term arbitrage strategy involving convertible bonds and stock borrowing, emphasizing the importance of managing premium fluctuations to secure profits [1][2]. Summary by Sections Strategy Overview - The strategy involves borrowing stocks and purchasing convertible bonds when they are undervalued, then selling the stocks short to lock in price differences, and finally reversing the positions when the bonds appreciate [2][4]. Execution Steps 1. Daily monitoring of the "borrowable stock ranking" before market opening to identify suitable convertible bonds [3]. 2. Buy convertible bonds and simultaneously sell an equivalent amount of previously acquired stocks short [4]. 3. During the holding period, collect interest from the borrowed stocks, which is typically around 8% to 10% annually [4]. 4. Aim for a premium increase of 6% to 10% before closing the positions by selling the bonds and covering the short position [4]. 5. If premiums do not recover, there is an option to convert the bonds into stocks to mitigate losses [4]. Profit Calculation - The potential profit from the strategy is derived from the premium increase, with an example showing a profit of approximately 4 units after accounting for interest and dividends [4][12]. Challenges and Considerations - Key risks include the inability to borrow stocks, high interest and dividend costs exceeding premium recovery, and sudden changes in bond terms or redemption [5]. - The strategy is particularly suited for quantitative trading due to its defined conditions, suggesting automated systems may be employed for stock borrowing [7]. Practical Examples - A case study illustrates a successful execution of the strategy during a market downturn, resulting in an 8% profit from a convertible bond with a low premium [6]. Conclusion - The article concludes that this arbitrage strategy is effective and sustainable, encouraging readers to explore its application in their trading practices [1][7].

Core Viewpoint - The U.S. convertible bond market has emerged as one of the strongest asset classes in 2025, driven by materials, technology stocks, and growth companies, with an overall return rate surpassing most major asset classes [1] Group 1: Market Performance - The ICE BofA U.S. Convertible Bond Index reported a cumulative return of approximately 14% year-to-date, outperforming the S&P 500 Index's 13% during the same period [1] - Major convertible bond ETFs have shown exceptional performance, with the SPDR Bloomberg Convertible Securities ETF (CWB.US) rising 15% and the iShares Convertible Bond ETF increasing by 16% this year [1] - The convertible bond market is projected to have one of its best absolute and relative performance years in nearly a decade, with a notable reversal compared to 2024 [1][3] Group 2: Key Contributors - High Beta stocks have significantly contributed to the market's performance, with notable issuers including Bloom Energy (BE.US), MP Materials (MP.US), and Boeing (BA.US) [2] - Boeing's convertible preferred stock has appreciated approximately 40% since its issuance, benefiting from a substantial rebound in Boeing's stock price [2] - Alibaba (BABA.US) has emerged as a major overseas issuer, completing a $3.2 billion convertible bond issuance this year, with both its stock and convertible bond prices experiencing significant increases [2] Group 3: Market Dynamics - The current U.S. convertible bond market size is approximately $325 billion, with low retail investor participation due to the complexity of the product structure [2] - Institutional investors dominate the market, particularly arbitrage traders who buy convertible bonds while shorting the underlying common stock [2] - The average interest rate for convertible bonds is currently at 2%, with an average conversion premium of about 35% [3] Group 4: Future Outlook - The issuance of convertible bonds in the U.S. has reached $75 billion this year, with expectations to exceed $84 billion in 2024 [3] - The market is described as being in a "Goldilocks" phase, characterized by low interest rates, tight credit spreads, and high volatility [3] - Over half of this year's global issuances are categorized as "no specific use of proceeds," indicating a shift in funding strategies for companies [3]

Report Overview - The report is a private fund special report focusing on how to achieve absolute return strategies in convertible bond investments [1] Industry Investment Rating - Not provided in the report Core Viewpoints - For most investors, diversifying underlying strategies is the most direct way for asset allocation. The report introduces the convertible bond arbitrage strategy, an absolute return strategy, to enrich investors' investment toolkits [7] - Traditional convertible bond enhancement strategies face market volatility risks and do not belong to absolute return strategies. The convertible bond arbitrage strategy is the core path for absolute return strategies [9][11][13] - The convertible bond arbitrage strategy has unique return attributes and can maintain stability during the collective drawdown of neutral strategies, highlighting its allocation value in absolute return strategies [19] Section Summaries Convertible Bond Introduction - Convertible bond strategies mainly invest in convertible bonds. Convertible bonds have both bond and equity conversion properties, and their prices are related to the underlying stock price in a curve with an increasing slope. They can be seen as a combination of a regular bond and an American exotic option, and their "T+0" trading feature allows for intraday trading [8] Traditional Convertible Bond Enhancement Strategies - Traditional convertible bond enhancement strategies involve holding a basket of convertible bonds, with different selection methods. The "dual-low strategy" selects bonds with low conversion premium rates and prices, while more mature research uses multi-factor models. These strategies aim to profit from the price increase of convertible bonds but face market volatility risks and are not absolute return strategies [11] Convertible Bond Arbitrage Strategies - The simplest convertible bond arbitrage strategy is to convert bonds into stocks and sell them when the conversion premium rate is negative, but this is rare. The more commonly used strategy is similar to the option Gamma scalping strategy, which requires accurate pricing of the option part of the convertible bond. The key is to estimate the Delta elasticity accurately. The pricing of the option part of convertible bonds is complex and often uses simulation methods. In practice, the long side is to buy convertible bonds, and the short side can use securities lending or stock index futures for hedging [13][16][17] Optimal Allocation of Convertible Bond Arbitrage Strategies - The convertible bond arbitrage strategy performs better in high-volatility market environments. When selecting a manager, factors such as the ability to price complex options, trading execution in hedging, and the ability to select convertible bond targets should be considered. Managers with option research, trading, and convertible bond investment backgrounds may be more suitable [18]