Hedge fund involvement in convertible securities

Brown, S.J., Grundy, B.D., Lewis, C.M. and Verwijmeren, P. (2013) Hedge fund involvement in convertible securities. Journal of Applied Corporate Finance, 25(4), pp. 60-73. (doi: 10.1111/jacf.12043)

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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.<p></p> 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.<p></p>

Item Type:Articles
Glasgow Author(s) Enlighten ID:Verwijmeren, Professor Patrick
Authors: Brown, S.J., Grundy, B.D., Lewis, C.M., and Verwijmeren, P.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:Journal of Applied Corporate Finance
ISSN (Online):1745-6622

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