A crowded trade not worth pursuing - and an unloved trade worth a closer look

Elms: I guess the reason is that investors don't have perfect foresight. So, if we knew that it was going to be a bull market and that assets were going to go up, then you would not need alternatives. You wouldn't need hedging; just be fully invested or lever up and let the good times roll. But we don't know that. 

And it feels obvious in hindsight that it was going to happen, but there are no sure things in markets. So, the proposition of alternatives is in the name. It's to be there when things don't necessarily work out the way you expect them to or the way you hope them to. 

Elms: Convertible arbitrage is interesting because there's a big funding advantage for convertibles right now. If you are the CFO of a publicly listed company, it's much more advantageous to raise money in the convertible market than in the high-yield market. But to get convertible investors into the issue, as you raise money, you need to price the convertible slightly cheaply. 

That's the arbitrage edge that we look for, in the slightly cheap paper. So an environment that causes companies to want to issue lots of convertibles creates lots of opportunities for us, and we're in exactly that environment at the moment. There's a big need for refinancing and there's a big advantage to convertibles in this environment.

Arbitrage is always about comparing a security to the pricing of another security. Classically, in convertibles, it's the convertible bond that gives you equity upside but fixed income performance on the downside. The way we express that in the portfolio is long the convertible bond and short the equity. That spread between them is what we're trying to capture as the arbitrage position. 

In your fund's documentation, you talk about wanting to avoid crowded trades while wanting to uncover new sources of return. Can you give us an example of that?

This has become a crowded trade, with lots of people selling volatility. This compresses the price of volatility. What it means if you take the other side of that crowded trade is that there are opportunities to make outside of profits. And we have seen a big spike in volatility and a lot of that has to do with the crowding starting to unwind in that particular trade. 

See alternatives in a different light

To perform differently from the market, you have to invest differently. You can find further information on the Janus Henderson Global Multi-Strategy Fund here, or via the Fund Profile below.