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will fully hedge interest rates. For example, in Japan, interest rates are very low. They don't want to be on the wrong side when the market turns. Therefore, they are fully hedged.

Where it is possible to asset swap the credit or buy default protection at reasonable levels, they will do so. They may also short high-yield bonds, short other convertibles, short credit derivatives, or buy credit derivatives. But to fully hedge all credit risk on a continuous basis would be very expensive so they take an opportunistic approach.

Some trades are on for days while others are four to five years old. Stark Investments will hold a trade until the mispricing corrects itself.

Why do these arbitrage strategies remain attractive? Why do these inefficiencies persist? Stark says arbitrage securities tend to be very complex, technology skills vary, financing arrangements differ, and people analyze instruments from different perspectives. All of the major arbitrageurs have different competitive advantages. Stark also observes that the markets are heavily moved by greed, panic, and fear. Sometimes these emotions dominate and create inefficiencies.

How large a role does technology play in the portfolio? Technology companies have been some of the primary issuers of convertible products in the United States and Japan. Thus, a convertible arbitrage fund will typically have a fair amount of exposure to technology names. Stark says, "We are no different, though we are probably underweight technology relative to the convertible indexes because we tend to be skeptical of the creditworthiness of many new-economy companies."

Where on the continuum of convertible arbitrage does Stark Investments fit? If at the left end of the spectrum is the pure black box and at the right end is the manager who invests and hedges based on a fundamental view, Stark would fit between center and the pure black box end. "Models tell us where to be but we qualitatively adjust at the margin. We are quantitatively driven but not purely," says Stark. Human input is used to adjust hedges as well as do fundamental and credit analysis that provide input into the models.

OVERLAP IN THE ORGANIZATION.

Unlike other specialist organizations, Stark Investments has overlap.

Stark heads up the convertible arbitrage area while Roth heads up risk arbitrage. Underneath them, there is a layer of portfolio managers