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Convertible bonds can sometimes feel like the forgotten child of the capital structure, especially for investors steeped in leveraged finance. But in this conversation with Orlando Gemes, the founder of Fourier Asset Management (FAM), a specialist credit hedge fund, we hear why convertibles deserve a second look. We discuss inefficiencies, data, systematic strategies, and the beauty of clean inputs.

1. Let’s start with the basics. Most of our readers live in the world of high yield, loans, and distressed. What is it about convertible bonds that makes them worth paying attention to right now?

It’s a fair question, especially for a LevFin audience. From a risk-adjusted return perspective, convertible arbitrage consistently outperforms all segments of the credit market, including high yield. Distressed credit can offer best-in-class alpha, but it comes with gap risk, illiquidity, and the risk of big drawdowns. In contrast, convertible arbitrage has historically delivered more consistent returns with lower volatility. Ultimately, hedge funds should be judged on risk-adjusted returns — and by that measure, convertibles stack up very well.

The key point is convertibles sit at the intersection of credit and equity. That hybrid structure introduces complexity but also opportunity, because most investment and banking institutions are still set up in silos. Their equity teams don’t talk to credit, and vice versa. That creates inefficiencies that can be exploited.

High yield, leveraged loans — those parts of the market are well-covered, highly intermediated, and very efficient compared to convertibles. There are smart people running similar screens, often crowding into the same capital structures. With convertibles, you’ve got this hybrid instrument — part credit, part equity, part optionality — that doesn’t sit neatly in anyone’s bucket. Equity PMs often focus on volatility, and credit PMs don’t always properly utilise volatility to model the equity optionality. That misalignment creates pricing inefficiencies — and that’s where alpha lives.

Convertibles is also a much smaller, thinner market. Credit hedge funds globally account for around 15% of total hedge fund AUM — roughly $550bn. But within that, convertible arbitrage AUM has declined a lot since the GFC. TRACE data shows daily volumes in convertibles are just 5% of the overall US dollar corporate bond market. That gives you a sense of how niche this is. For us, that's a positive. Less competition means more opportunity — if you can get the modelling right.

Our background is in fundamental credit — across IG, high yield, structured products — and in those markets you’re always fighting convexity, poor liquidity and inconsistent data. With convertibles, the instruments are complex, and the data is often ‘dirty’ or incomplete. But if you can clean and structure that data — which is what we’ve focused on — you get a very repeatable edge.

2. Why do you think those inefficiencies persist? You’d think the market would have caught up by now.

You would, but the market remains niche. The market value of the US convertible market is just $314.7bn, while the value of the EMEA market is just $67.8bn, according to Barclays numbers. By comparison, the US high yield market can issue over $40bn in single month (October 2024).

From 2004, when I was trading a vast number of CDS contracts across IG, HY and financials, I recognised that the models are complex and the data is often inaccurate. Most market participants use end-of-day prices from third-party providers.

This data has significant flaws, and it does not capture the intraday volatility, which is why credit VAR calculations are inaccurate and misleading.

At the same time, many hedge funds have moved to multi-strategy platforms, where pods run discretionary strategies. So you end up with a complex, fragmented, and under-covered asset class. And for us, that’s where the opportunity lies.

3. Your background is in fundamental credit. Has that shaped the way you approach convertibles?

Absolutely. I started in fundamental credit across investment grade, high-yield financials, and structured derivatives. That world taught me about negative convexity, gap risk, inconsistent liquidity, and dirty data. Furthermore, corporate governance is often weak, and there are conflicts of interest between the issuers and investors, and between credit and equity. These challenges are also familiar in convertibles, but the hybrid structure makes them more nuanced.

A lot of convertible managers rely on volatility-centric models that use standard inputs, but we think those inputs are highly subjective. Our experience with CDS, CDOs, CDO-squareds, CPPIs and CLOs has shown us the limitations of standardised modelling. To avoid that bias, we use empirical data that’s been rigorously cleaned.

4. You mention empirical data. Could you walk us through how that plays into your investment process?

Over the past five years, we’ve built a systematic framework that allows us to dynamically calculate fair value and Greeks based on cleaned data. We aggregate information from a wide range of sources, rather than relying solely on a third party provider.

Data quality is critical. People say “garbage in, garbage out,” and that’s true to a point. But we’ve found that even ‘dirty’ data can be made useful if you approach it scientifically. With coding skills, mathematical modelling, and healthy skepticism, you can extract signal from noise.

5. That sounds very quant-heavy. How did your team come together?

We’ve made a deliberate effort to hire from STEM disciplines rather than traditional finance backgrounds. Many of our team members joined straight out of university. They come with strong problem-solving skills, coding fluency, and no preconceived ideas about how securities should relate to one another.

We’ve also built a dedicated STEM PhD programme and invested a significant portion of our working capital into developing our own data lake. It’s about creating an information advantage. The aim is always to deliver repeatable alpha.

6. So how does your strategy differ from other convertible arbitrage managers?

Many of the large players, especially on multi-strat platforms, rely on similar volatility-based models and derive a good chunk of alpha from new issue harvesting. Our approach is different. We currently don’t focus on the new issue premium. Instead, we aim to identify alpha signals that are largely ignored.

Our first fully systematic strategy has a much shorter holding period than that of our peers. That leads to very low correlation with the S&P 500, and a risk profile that is markedly different.

As we grow, we intend to expand into 7-10 sub-strategies. But the core thesis remains: eliminate bias, use clean empirical data, and stay systematic.

7. Where do you see the risks in convertibles today?

The obvious historical example is 2008, when convertible arbitrage strategies saw a ~30% drawdown. Back then, the market went from rich to cheap almost overnight, liquidity dried up, and financing costs surged. The new issue market also stalled.

Since then, convertible arb AUM has shrunk, and much of the space is now dominated by multi-strategy firms. They often have similar exposures and use similar models. A market consensus is formed, but the lack of a diversity of investors in the product results in a lack of next buyer when equity slumps and the bond floor is tested. Buyers do step in, but not until the convertible debt trades on a substantial discount to the same seniority straight debt. The issuer habit of not applying for a rating is a significant factor here, as the buyer has to do a deep dive into the offering documentation and credit valuation.

Still, the longer-term historical data shows that convertible arbitrage has delivered strong and consistent alpha over time.

8. With all that institutional capital flowing to multi-managers, is there still room for smaller or emerging hedge funds?

It’s the million dollar question. Multi-strats have scaled impressively. They deliver repeatable alpha, invest heavily in quant resources and risk management, and have the budget to acquire a lot of alternative data.

But they also tend to hire PMs with proven track records, often former market makers or from other multi-managers. In the convertibles space, you might find a firm over 10 different pods. That creates opportunities for smaller managers to exploit overlooked areas, to aspire to be different to our peers.

9. What from your personal life has influenced how you think about markets?

My mother is a photographer who worked closely with indigenous communities in Australia. My stepfather was a poet. From them, I learned the value of creativity and being comfortable outside the mainstream.

One of Jim Simons’ five principles is to surround oneself with beauty. I grew up with that instinct. My stepfather introduced me to Hemingway, Mailer and Keats. Keats wrote, “Beauty is truth, truth beauty...” That idea has stayed with me. I think it’s relevant to investing too. Sometimes the most elegant idea is the most robust.

Launching a new emerging hedge fund with a new approach requires great trust. Several of my family members have since have co-invested in our strategy. That’s been a special experience.

9Questions is our Q&A series featuring key decision-makers in leveraged finance and distressed debt — explore the full collection here.