| 06 November 2009
At the end of last year, my opinion was the fattest pitch in investing over the near term was convertible arbitrage. The downside seemed very limited, the upside large and unlikely to correlate with the market. Well, it did correlate with the market, at least once the market turned. In essence everything did. Before that, it did pretty well on the downside so I got that part right.
Jake at Econompic gives us this chart, which shows that convertible arbitrage has indeed led the way this year:
Unfortunately, he has a fine post, which shows the dark side of this rally and the “carry trade” which has been helping finance it:
if the correlation of assets purchased is near one on the way up, it is sure as hell going to be that high or higher on the way down. And what happens to all these investors that are attempting to leave the same exit door at the same time? Massive re-purchasing of the dollar and massive selling of any risk asset... joy.
Joy indeed.
Update: Nouriel Roubini and Felix Salmon see the same issue.