Convertible bond arbitrageurs attempt to exploit inefficiencies in the pricing of convertible bonds by purchasing the undervalued security and hedging market and credit risk using the underlying share and credit derivatives. Existing literature indicates that this strategy generates positive abnormal risk adjusted returns. Due to limitations in hedge fund reporting, performance measurement to date has been limited to studies of monthly returns. The use of monthly returns ignores important short run dynamics in price behaviour. This paper addresses this gap in the literature by replicating the core underlying strategy of a convertible bond arbitrageur to produce daily convertible bond arbitrage returns. The core strategy is replicated by constructing an equally weighted and a market capitalisation weighted portfolio of 503 hedged convertible bonds from 1990 to 2002, producing two daily time series of convertible bond arbitrage returns. For out of sample comparison the monthly risk/return characteristics of the portfolios are compared to the risk/return profile for two indices of convertible arbitrage hedge funds. The portfolio returns are
then tested against the returns of a buy and hold equity portfolio indicating that the relationship between convertible bond arbitrage and traditional long only equity portfolios is non-linear. Results indicate that convertible bond arbitrage returns are positively correlated with equity markets in severe downturns and negatively correlated with equity markets in severe upturns.