Diverse Alpha sources and limited risk

Convertible bonds are hybrid securities. They combine the strengths of two asset classes and are essentially bonds with an equity call option. They are debentures with a fixed interest rate that can be converted into equities within a specified period at a pre-set rate. One key feature of convertible bonds is that they are more reactive to rising share prices than to negative trends. This asymmetric risk/return profile (convexity) offers investors the opportunity to participate in upside potential on the equity markets while limiting possible losses due to its bond-like nature. 

They offer investors multiple alpha sources. The various performance drivers include price trends in the underlying equity, the coupon and the credit spread (difference in yield compared to a risk-free bond with the same maturity) and structural features such as contractual safeguard clauses against capital dilution or takeover. Alongside an investment in blue chips, they also provide access to smaller and medium-sized companies that are under-represented in the bond market and thus offer additional diversification.