Editor's note: This article has been corrected to reflect the fact that convertible arbitrage is no longer a predominant business segment for Calamos Asset Management.

It wasn't a great time to start a mutual fund in 1977, but that didn't stop John Calamos. Then again, he wanted to concentrate something that not widely focused upon in the investing public: convertibles.

A convertible, in the investing sense, is a hybrid creature that combines the features of a stock and bond. Like a bond, it pays an interest rate and requires a company to repay principle. However, if the stock price increases, the investor can convert the instrument into company stock. It's a way of having your cake and eating it, too. Even Warren Buffett has used convertibles to structure his investments.

Calamos and his company, Calamos Asset Management (NASDAQ:CLMS), have been profitable over the years, and the latest quarter is no exception. Its second-quarter results, released yesterday, showed a 59% surge in earnings to $7 million, or $0.30 a diluted share, up from $4.4 million, or $0.19 a diluted share last year. During this same period, assets under management increased 22% to $39.5 billion.

Lately, Calamos has been expanding its product line. In the second quarter, the company launched its International Growth Fund, and there are plans to start a mezzanine fund, which will provide debt financing for mostly private companies. Contrary to popular opinion, Calamos has diversified its product mix from its origins -- convertibles -- to other asset classes. Convertibles currently represent 16% of assets under management (and are closed to future investment), and equities represent 50%.

And this weighs to Calamos' benefit: In the world of asset management, convertible mutual funds are a niche -- and will likely remain so. And while it is a profitable area of business, it is undoubtedly finding itself subject to more competition as more money flows to convertible arbitrage hedge funds.

Nevertheless, the Calamos Convertible Fund (FUND: CCVIX) has been ranked No. 1 for the past 10 years in its category, according to research-and-analysis company Lipper.

The potential downside is that most of Calamos' revenue derives from fees based on assets under management, which makes it extremely sensitive to market dips. The company does have an exposure to fixed income and equities, which provide a shield. And convertibles can act as a natural hedge. But interest rates moving in the wrong direction relative to their positions could bake up a nasty quarter, particularly in the company's fixed income/convertible portfolios.

What's more, it appears that the asset-management business is undergoing tremendous consolidation, with the recent deal between Legg Mason (NYSE:LM) and Citigroup (NYSE:C) serving as an example. It seems inevitable that these deals will put more pricing pressure on mutual funds, especially the smaller ones. In other words, the best option for Calamos shareholders may be to join a bigger player, rather than remain independent.

Even so, though, Calamos has proved to be a reliable producer of extraordinary returns, and investors might just pay for them in spite of the options -- and potential dangers.

Fool contributor Tom Taulli does not own shares of companies mentioned in this article.