Convertible arbitrage is emerging as one of 2025’s standout hedge fund strategies, with managers capitalising on a rare alignment of stable credit markets and elevated single-stock volatility, according to a report by Bloomberg.

Funds running the trade – which involves exploiting pricing inefficiencies between convertible bonds and the underlying equities – have gained nearly 6% through July, according to Hedge Fund Research. That performance has helped attract the largest inflows into the strategy in almost two decades, with assets in convertible arb funds now at $84bn.

Managers are increasingly focused on the equity option embedded in convertibles, particularly as refinancing opportunities from Covid-era debt rollovers begin to fade. Stock-specific swings – often multiples of index-level volatility – are providing rich trading ground. Recent sharp moves in names like Fluor Corp and Array Technologies have reinforced the strategy’s appeal.

Issuance is also fuelling opportunities. US convertible bond sales have already topped $65bn this year, surpassing 2023’s total and marking one of the strongest years in two decades, Barclays data show. Crypto-linked issuers such as Coinbase and MicroStrategy have become a key part of the market, adding volatility-linked dispersion trades to the mix.