A hedge fund that goes long in a convertible bond and short in the equity of the same firm is employing a market neutral arbitrage strategy.

Question

Quizplus · Accepted Answer

This is a classic example of a market neutral arbitrage strategy, where the hedge fund is betting that the convertible bond will outperform the equity, but is hedging their overall exposure to the market by shorting the equity. This strategy aims to generate profits regardless of the overall direction of the market, and is thus market neutral.

A Hedge Fund That Goes Long in a Convertible Bond