Hedge Fund Involvement in Convertible Securities

16 Pages Posted: 23 Dec 2013

See all articles by Stephen Brown

Stephen Brown

New York University (NYU) - Leonard N. Stern School of Business

Bruce D. Grundy

University of Melbourne

Craig M. Lewis

Vanderbilt University - Finance

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: Fall 2013

Abstract

Convertible arbitrage hedge funds combine long positions in convertible securities with short positions in the underlying stock. In effect, hedge funds use their knowledge of the borrowing and short‐sale market to hedge themselves while distributing equity exposure to a large number of well‐diversified investors through their short positions. The authors argue that many “would‐be” equity issuers that would otherwise pay high costs in a secondary equity issue choose instead to issue convertible debt to hedge funds that in turn distribute equity exposure to institutional investors. This allows companies to receive “equity‐like” financing today at lower cost than a secondary equity offering. The authors' findings also suggest that more convertibles will be privately placed with hedge funds when issuer and market conditions suggest that shorting costs will be lower.

Suggested Citation

Brown, Stephen and Grundy, Bruce D. and Lewis, Craig M. and Verwijmeren, Patrick, Hedge Fund Involvement in Convertible Securities (Fall 2013). Journal of Applied Corporate Finance, Vol. 25, Issue 4, pp. 60-73, 2013, Available at SSRN: https://ssrn.com/abstract=2371492 or http://dx.doi.org/10.1111/jacf.12043

Stephen Brown

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Bruce D. Grundy

University of Melbourne ( email )

Faculty of Economics & Commerce
Department of Finance
Victoria, 3010
Australia
+61 3 8344 9083 (Phone)
+61 3 8344 6914 (Fax)

Craig M. Lewis

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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