Convertibles are back in fashion ... but how can they avoid the pitfalls of the past?

Convertible bonds are back on investors' radars after an overvalued market imploded early last year. But how sustainable is the recovery - and how can it avoid repeating the pattern of the last bloodbath? Jean-Paul Carbonnier investigates

Just over a year ago the convertible bond market was reaching the trough of a painful adjustment. The UBS global convertible bond index dropped 6% in the first five months of 2005, despite relatively benign stock market conditions. Poor performance led many asset allocators to withdraw funds from convertible arbitrage, triggering a string of redemptions that accelerated the sell-off.

In the ensuing bloodbath some hedge funds, like Akela Capital and Marin Capital, were forced to shut up shop and