Deliver Returns Greater than the Convertible Bonds Index

• Davide Basile
  Partner and head of the Convertible Bonds team
  Redwheel

With implementing three alpha levers manager aims to provide  a return that exceeds the Refinitiv Global Focus Convertible Bond benchmark index after fees. 

1st Lever: Delta Optimisation

The first lever that the investment team may employ to overcome fees is through delta optimisation. Each bond provides a different contribution to delta (equity sensitivity) therefore by overweighting the higher delta/gamma (most efficient convex profile), the team can neutralise the delta exposure to each individual issuer and extract cash, without having a difference in equity basis vs the index. A switch would raise cash and optimize for the better profile. Through the execution of the switch, a significant cash raise could occur to be invested within a cash management approach without significant equity exposure deviation.

2nd Lever: New Issuance

The investment team can use the second lever of new issuance to offset fees. Historically, new issue bonds have traded 1-2% higher, with the negative skew rarely falling below 3%, while the positive skew often exceeds 5%. Active managers traditionally highlight this as a source of alpha as indices do not participate in primary activity. Current ETF’s do not participate in this Alpha generation

3rd Lever: Lending

The third lever that the team will implement is a custodian-managed lending program, which will have the potential to generate income based on the valuation of the asset class. The team anticipates that this strategy will create incremental revenue, especially as the asset class richens over time and borrowing costs rise.
 
The balanced convertible bond index has achieved a return of +7.3 percent since the beginning of the year and a return of +15.9 percent in the past year up to 30 June 2025. Thus, it was able not only to closely matching with the performance of both the MSCI World and global fixed income indices, but in some cases outperform them.

In light of the strong performance of convertible bonds and the current market situation, now is the ideal time to offer investors a cost-efficient solution for accessing this asset class. With our new fund, we combine active management with a clear goal: to deliver above-market results with controlled risk.

With the launch of the Redwheel Enhanced Index Focus Convertibles Fund, the company is expanding its range of specialized strategies with a solution specifically tailored to the potential of convertible bonds in the current market environment. The fund offers institutional and private investors a cost efficient, smart, and reliable way to strategically integrate convertible bond exposure into their portfolios.