Convertible Bond Arbitrage: A Strategy Reawakening — Insights from Industry Veteran Odell Lambroza
Convertible bond arbitrage has long been one of the hedge fund industry's most sophisticated and resilient absolute return strategies. Though it faced a period of reduced opportunity during years of low interest rates and subdued volatility, the environment is shifting — and with it, this strategy’s potential is resurfacing.
In this edition of Resonanz Spotlight, host Vincent Weber speaks with Odell Lambroza, Chief Investment Strategist and Co-Portfolio Manager of Advent Global Partners and Advent Vega Strategies. With more than 25 years of experience in convertible securities, Lambroza shares his insights into the evolution, mechanics, and future trajectory of convertible bond arbitrage.
What Is Convertible Bond Arbitrage?
A Market-Neutral Strategy Built on Pricing Inefficiencies
Convertible bond arbitrage involves:
- Going long a convertible bond
- Shorting the underlying equity
- Hedging risk through dynamic rebalancing
This creates a hedged position that allows investors to monetize volatility, rather than relying solely on directional moves in the stock market.
“Convertible arbitrage is generally considered an absolute return strategy because we hedge the equity risk and generate performance through volatility trading.” — Odell Lambroza
The strategy blends fixed income, equity, and options characteristics, making it attractive for investors seeking diversification and non-correlated returns.
Who Issues Convertible Bonds? Key Sectors and Trends
The convertible bond market has historically attracted fast-growing, innovation-driven companies — particularly in:
- Technology
- Healthcare & biotech
- Cloud computing
- Digital assets and blockchain-related businesses
Well-known issuers over the years include NVIDIA, Advanced Micro Devices, Microsoft, Tesla, and Uber.
These sectors often issue convertibles to raise capital efficiently while reducing immediate equity dilution.
How Liquid Is the Convertible Bond Market?
Liquidity remains a frequent question for investors — and according to Lambroza, the answer is positive.
Higher Liquidity vs. High-Yield Markets
The convertible bond market today is:
- More liquid than the high-yield bond market
- Supported by large, high-profile issuers
- Experiencing multi-decade highs in trading liquidity
This robust liquidity supports efficient hedging and active volatility trading — both essential components of the strategy.
How the Strategy Changed Since the Global Financial Crisis
The Global Financial Crisis (GFC) reshaped capital markets, but the fundamentals of convertible bond arbitrage remained surprisingly stable.
What Stayed the Same
- The core long-convertible/short-equity structure
- Dependence on option-theoretic models such as Black-Scholes
- The reliance on volatility and credit spreads
What Changed
The most profound shift came from market participants:
- Before the GFC: approximately 70% of capital in the convertible market came from hedge funds.
- Today: long-only and institutional investors dominate.
This shift created more inefficiencies, which hedge funds can exploit — effectively enhancing arbitrage opportunities.
Who Are Today’s Market Participants?
The market now consists largely of:
- Long-only asset managers
- Institutional investors
- Global multi-asset allocators
These investors often generate pricing dislocations, providing fertile ground for hedge funds specializing in volatility and relative value trading.
“Long-only managers create the inefficiencies we need to generate returns. It’s been a positive development since the GFC.” — Lambroza
Odell’s Professional Journey: Lessons from Crises and Calm Markets
Odell Lambroza began his career in derivatives at Merrill Lynch and later joined Advent in 2001 to help build its convertible arbitrage business.
His biggest professional challenges include:
- Navigating the Global Financial Crisis
- Managing through COVID-19
- Periods of extremely low volatility
Interestingly, Lambroza notes that low-volatility environments can be just as challenging as full-blown crises because they reduce gamma-trading opportunities — a key performance driver.
Key Drivers of Returns in Convertible Arbitrage
Convertible-arb performance generally comes from three main sources:
1. Fixed Income Carry
Convertible bonds provide:
- Coupons
- Bond convexity
- Downside protection vs. straight equity
2. Short Rebate Income
Shorting the equity generates financing income, which contributes to total return.
3. Volatility / Gamma Tranig
This is the core engine of the strategy:
- Managers hedge and re-hedge positions as the underlying stock moves.
- Price fluctuations allow monetization of realized volatility.
Unlike long-only strategies that rely on markets to rise, convertible arbitrage benefits from multiple independent sources of return, making it a true all-weather strategy.
What Are the Main Risks?
No strategy is without risks. Key considerations include:
1. Technical Market Dislocations
Events like:
- ETF outflows
- Mutual fund liquidations
- Forced selling in stressed markets
These can push spreads wider temporarily, requiring active risk management.
2. Periods of Low Realized Volatility
If markets trade in extremely tight ranges for extended periods, gamma trading becomes less profitable.
Experienced managers navigate these risks through diversification, position sizing, and dynamic hedging.
When Does Convertible Bond Arbitrage Perform Best?
Convertible arbitrage thrives under:
✔ Medium to Higher Interest Rates
Higher rates make convertible bonds more attractive for issuers, increasing new issuance — a key driver of trading opportunity.
✔ Moderate to Elevated Market Volatility
In today’s world of:
- Economic uncertainty
- Global elections
- Geopolitical tensions
…volatility levels are expected to remain supportive for the foreseeable future.
✔ Healthy New Issuance Cycles
Rising rates and tech-driven capital needs have led to a rebound in global convertible issuance.
“Medium to higher rates and ongoing economic uncertainty are wonderful variables that allow convertible arbitrage to perform well.” — Lambroza
The Outlook: Why the Strategy Is Re-Emerging
After years of subdued activity, the environment for convertible arbitrage is improving:
- Higher rates → increased issuance
- Geopolitical uncertainty → volatility
- Institutional flows → pricing inefficiencies
- Renewed investor interest → strategy expansion
For investors seeking diversification, absolute returns, and non-directional exposure, convertible bond arbitrage may be entering a renewed period of relevance.
Final Thoughts
In this conversation, Odell Lambroza illuminates why convertible bond arbitrage remains one of the most enduring and adaptable strategies in the hedge fund universe. Despite market cycles, regulatory shifts, and evolving investor behavior, its quantitative foundation and multi-source return profile make it uniquely resilient.