Convertible arbitrage is a popular hedge fund strategy that involves:

1. Buying a convertible bond (a bond that can be converted into a predetermined number of shares of the underlying stock)

2. Selling the underlying stock (shorting the stock)

The goal is to profit from the difference between the conversion price of the bond and the market price of the underlying stock.

Here's how it works:

1. Buy a convertible bond with a conversion price of $50

2. Short the underlying stock at the current market price of $45

3. If the stock price rises to $55, convert the bond into stock and sell it at $55, pocketing the $5 difference

4. If the stock price falls to $40, buy back the shorted stock at $40 and profit from the $5 difference

Convertible arbitrage strategies aim to exploit pricing inefficiencies between the convertible bond and the underlying stock, while managing risk through hedging and diversification.

This strategy is popular among hedge funds due to its potential for generating consistent returns with relatively low risk. However, it requires sophisticated risk management and a deep understanding of the convertible bond and equity markets.