Introduced in 1997, the Symphony Convertible Arbitrage Strategy is designed to produce consistent returns in a variety of market environments. The portfolio typically holds 50-125 total positions, excluding equity positions. The strategy invests in convertible bonds together with short positions in the underlying common stock, as well as places opportunistic short positions in single name corporate bonds and credit default swaps.
Symphony's convertible arbitrage strategy invests primarily in U.S. convertible securities, but may invest up to 20% of its assets in non-U.S. convertible securities. The maximum position size allowed is 10%, the average holding period typically does not exceed twelve months and the estimated quality range of the portfolio is CCC to AA. Based on Moody's and S&P ratings, typically 40% of the portfolio is investment grade level, 35% of the portfolio is not rated and 25% is non-investment grade. Typical leverage ranges from 1.5:1 to 2:1, with leverage defined as long market value divided by capital. The strategy maintains the flexibility to allow Symphony's credit team to express views regarding the credit, equity and optionality features of a convertible bond.
Symphony employs a fundamental process in determining appropriate investments in the convertible-arbitrage portfolio, augmented by quantitative tools that allow Symphony's team to make relative value decisions between credit, equity, and volatility. The portfolio is valuation-driven, targeting credit, volatility-sensitive, and equity-sensitive names opportunistically based on the market environment.
Symphony's team is constantly using their expertise in analyzing companies across the capital structure to assess each company's underlying fundamental quality viewed from both an equity and credit perspective. Specific ideas are primarily generated by Symphony's integrated team of investment professionals, each with an industry focus. Symphony does not isolate the credit analysis from the equity analysis; we analyze companies from both perspectives prior to establishing a position in the fund. In addition, analysts consider the macro environment in which companies operate both from an industry specific view and sense of the general economy.
Symphony uses a propriety convertible pricing model supplemented by 3rd party models (Monis and Kynex) in order to screen and monetize mispriced opportunities. Liquidity screening assures that only bonds with investor depth and secondary market support enter the portfolios. Proprietary risk management systems help measure and control portfolio risk. Symphony captures value by opportunistically providing liquidity in the markets as well as actively trading the portfolio. Once a position is initiated, Greeks are monitored on a real-time basis and delta trading is performed in order to best capture time decay.