Hedge Funds Return to Bond Trade With Checkered Past (1)

A surge in issuance of a type of bond that can convert into stock on maturity is helping revive a hedge fund strategy that was crushed during the financial crisis.

So-called convertible arbitrage, in which investors try to capitalize on price discrepancies between a convertible bond and its underlying stock, attracted inflows in the first quarter as investors pulled billions out of other strategies, according to data from Nasdaq eVestment.

A typical trade involves taking a long position on a convertible bond and a short position on the underlying stock. If the share price falls, investors profit from the short. ...