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)

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.<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
• Status: Published
• Refereed: Yes
• 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: 1078-1196
• ISSN (Online): 1745-6622