Hedge Fund Arb Trade Surfs $140 Billion Wave of Debt Coming Due

In a niche corner of the bond market, an almost $140 billion wave of maturing debt is poised to lend momentum to what is already one of Wall Street’s hottest hedge fund trades.

About 40% of all dollar-denominated convertible bonds in the world come due by the end of 2026, according to data compiled by Bloomberg, throwing up all manner of opportunity for an arbitrage strategy beloved by fast-money players like AQR Capital Management and Man Group.

The bet is the corporations that issued the debt — notes that can turn into equity if conditions allow — will likely opt to refinance as maturities approach, creating a potential double windfall for opportunistic hedge funds who have snapped up the paper.

First, issuers typically buy back old bonds at a premium of a few percentage points to their trading price, allowing holders to make easy money. Second, companies will often issue new converts simultaneously, giving favorable allocations to existing investors in the process.

“That often does quite well out of the gate, because most converts trade up after a new issue,” said Michael Youngworth, Bank of America’s head of global convertibles and preferred strategy. Refinancing “has been a very lucrative source of alpha for hedge funds this year,” he said.

The trade ties in perfectly with broader convertible arbitrage strategies, which typically involve buying the debt and selling the underlying shares short to create a hedged position with upside either way. A Bloomberg index tracking this tactic has gained 8.7% in 2024 so far, compared with 7.8% for a gauge of hedge fund strategies overall.

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