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Quant Investing: What Happens to Convertible Bonds in 2021? Part 2

down angle photography of red clouds and blue sky

In the previous report, we mentioned the abnormal performance of convertible bond ETF and tried to explain the source of its return. But, unfortunately, there seems to be no way to be explained by the Carhart 4-factor model.

We started from the corporate, industrial, and bond aspects, trying to find why the convertible bonds deviated from the market, but there was no good solution. So, finally, We tracked the share price performance of the companies this year and found that those companies have idiosyncratic risks that are different from the market.

Figure1 Performance of ICVT and Underlying Stocks

We use different strategies to hedge the risk of convertible bonds this year and back-test from 2015 to the present. We found that the allocation of convertible bonds and QQQ can effectively hedge the risk of CWB. As a result, the annualized remuneration increased from 14.5% to 24.9% while maintaining the annual positive return.

Figure 2 Backtest chart of hedging strategy
Table 1 Backtest result of hedging strategy

CY Yang
Quantitative Research Intern, Quantitative FinanceGamma Paradigm


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