Performance Persistence of Convertible Arbitrage Hedge Funds

This article aims at testing empirically the performance persistence of convertible arbitrage hedge funds. The overall objective and aim of this category is the use of convertible securities. It is expected that the performance of the fund will be greater than the benchmark by using a long /short position than a traditional long only position. The hedge fund manager invests in convertible bonds, warrants and convertible preferred stock that could be exchanged by buying a stock. This strategy is based on anticipating the changes of short – term interest rates. Guirguis,(2005), examined the major building blocks that affect the performance of hedge funds: incentive fees, management fees, size, age, hurdle rate, high watermark provision and lockup period. According to my findings the results are mixed. Management fees and age affect significantly the performance of hedge funds. My findings suggest that there are other factors that could contribute to this deviation such as lock-up periods, hurdle rate and high water mark. Dummy variables applied on the probit binary regression equation suggest that these three factors constitute a significant explanation of the performance persistence. The sample is provided from Data Feeder dataset. It includes convertible arbitrage hedge funds for the period 1990 to 2003