Convertible-Bond Arbitrage Loses Its Shirt

Deprived of Leverage, Hedge-Fund Strategy Set For Its Worst Year

The main reason for poor performance is that the underlying bonds have performed badly. The index published by UBS that tracks the prices of convertibles globally is down 35.8% this year. It fell 15.7% last month alone.

"The market has collapsed as never seen before. ... The reasons are: liquidity concerns, forced redemptions, risk reduction and the buyer of last resort has yet to appear," Jeremy Wyett, equity-linked analyst at Merrill Lynch, wrote last month.

I am curious about this. This is more of our over-leveraged, hypervdriven economy finding out low cost, tax free money making comes to a halt when one supporting card falls out.

When you are making money out of money and your returns are astronomical, does a 50% drop mean much more than the era of free money has halted? Is it really a bad thing? I like nice stuff as much as anyone, but somethings cannot last. The question is how hard will this hit the rest of us humans?