Convertible-Bond Craze Helps Cut Volatility in China Tech Stocks

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A rush by Chinese tech companies into convertible bond offerings is reviving a profitable trade for some arbitrage funds, a move that would also reduce volatility of their shares.

The arbitrage trade — a strategy that includes shorting the underlying stock after purchasing the convertible bond — requires funds to buy more shares if they fall or sell them if they rise in what’s known as “delta hedging.” That would reduce any wild swings, an important factor for the Hang Seng Tech Index given its recent slide into technical correction.