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| PRODUCT DEFINITION |
the purchase of a convertible bond and subsequent shorting of the equivalent underlying common shares, to create a positive cash flow position in a static environment. A simplified version of the arbitrage position’s return curve is depicted below. As the stock price decreases, the amount lost on the long convertible position is countered by the amount gained on the short stock position, theoretically creating a stable net position value.
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The goals of the convertible arbitrage product are to preserve capital through a convertible multi-strategy approach and to seek consistent, superior returns while moderating convertible, equity and overall market risks. A proper balance of diversified positions helps generate positive returns regardless of the overall market environment. Froley • Revy focuses on fundamental research, emphasizing credit analysis, and approaching each company from the bottom-up with a top down overlay. The Fund seeks to generate returns from cash flow trades, improving credits, volatility trades, capital structure arbitrage and identifying improperly valued opportunities. Additional goals of the Fund are comprehensive risk management, transparency, and overall stability in any market environment.
Froley, Revy uses models and risk metric programs to test among other things rho, vega and credit spread exposure. The programs perform key stress tests and scenario analyses. Risk programs will measure value-at-risk and will compare this risk with estimated return of the portfolio. All tests are performed on the portfolio as well as on a per position basis. The Fund aims to add a qualitative approach along with the quantified risks to then determine a proper amount of leverage employed in the Fund. Leverage will be used conservatively. The Fund will utilize an interest rate hedging matrix, a credit spread matrix, volatility matrix and a stock projections matrix to optimize our various hedges with respect to potential return. The Fund will pursue a diversity of trading strategies, equity sectors and market capitalizations to further mitigate risk and decrease correlation between positions.
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