This strategy involves purchasing undervalued convertible securities (bonds, preferred shares, and warrants) and hedging the underlying equity risk by selling short an appropriate amount of common shares of the issuer. Properly executed, this strategy creates a net position which is substantially neutral to the movements in the underlying equity and has an attractive yield. Interest income on the convertible bond, plus the rebate on the short stock, typically provides a positive carry or static return. There are further opportunities for gains independent of market direction as the relative value relationship between the long bond and short stock changes.
