OVERVIEW

Angelo, Gordon's convertible arbitrage portfolios are designed to generate returns by exploiting inefficiencies in the way that equity-linked investments are priced. The potential sources of return include the following: static return, convexity, volatility trading and credit spread tightening.

Static Return

The income stream of coupons from the convertible instrument combined with the interest generated from the short sale of common equity.

Convexity

Instruments with embedded options, such as convertible debt, will be more sensitive to upward movements of the underlying equity and will be less sensitive to downward movements. By frequently adjusting the size of the equity hedge over a range of equity prices, the value of this price sensitivity discrepancy can be effectively captured.

Volatility trading

Implicit in the price of an equity-linked instrument is the market's expectation of the volatility of a stock over the remaining life of the investment. If the perception of this volatility increases, the price of the instrument will increase.

Credit spread tightening

As convertibles entail the payment of a stream of coupons plus the possibility of the repayment of the principal, each contains an element of credit risk. As the perception of this risk lessens, the price of the instrument will improve. Our approach is based on our ability to combine fundamental and relative value analysis with extensive market trading experience to exploit inefficiencies in the convertible market. This allows us to produce predictable returns with limited risk.

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