Hedge Fund Involvement in Convertible Securities

16 Pages Posted: 23 Dec 2013

See all articles by Stephen J. Brown

Stephen J. Brown

New York University - Stern School of Business

Bruce D. Grundy

RSFAS Australian National University

Craig M. Lewis

Vanderbilt University - Finance

Patrick Verwijmeren

Erasmus University Rotterdam (EUR)

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 J. 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 J. Brown

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0306 (Phone)
212-995-4233 (Fax)

Bruce D. Grundy

RSFAS Australian National University ( email )

Kingsley Street
Acton ACT
Australia
0431247108 (Phone)

Craig M. Lewis

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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