{"id":111629,"date":"2021-02-05T22:31:50","date_gmt":"2021-02-05T22:31:50","guid":{"rendered":"https:\/\/precoinnews.com\/?p=111629"},"modified":"2021-02-05T22:31:50","modified_gmt":"2021-02-05T22:31:50","slug":"analysis-the-other-winners-of-the-reddit-fueled-rallies-convertible-debt","status":"publish","type":"post","link":"https:\/\/precoinnews.com\/markets\/analysis-the-other-winners-of-the-reddit-fueled-rallies-convertible-debt\/","title":{"rendered":"Analysis: The other winners of the Reddit-fueled rallies: convertible debt"},"content":{"rendered":"

NEW YORK (Reuters) – Among the winners from the recent retail-driven frenzy in U.S. stocks are investors in the niche market of convertible debt, capping a year of gains for the securities and potentially drawing new interest.<\/p>

FILE PHOTO: An AMC theatre is pictured amid the coronavirus disease (COVID-19) pandemic in the Manhattan borough of New York City, New York, U.S., January 27, 2021. REUTERS\/Carlo Allegri<\/figcaption>

While buyout firm Silver Lake capitalized on a surge in AMC Entertainment, one of the stocks at the epicenter of the retail frenzy linked to a convertible bond, others have also seen their bonds gain.<\/p>\n

Those holding convertible notes – which allow investors to convert the debt to equity when a company\u2019s shares hit a set price – in Ligand Pharmaceuticals have seen prices rise 10% since Jan. 25. Over the same period, the American Airlines convertible note rose to a record high, as did that of First Majestic Silver, last up 9% and 14% respectively. All three stocks were pushed higher in the retail buying rush.<\/p>\n

\u201cThis is why you buy convertibles,\u201d said Geoff Dancey, portfolio manager at Cutler Capital Management, who bought into the Ligand convertible bond just before the Reddit rally.<\/p>\n

\u201cWe are benefiting from the rise, the same way as equity investors,\u201d said Arnaud Brillois, who manages the global convertible portfolio at Lazard Asset Management. He noted that not all stocks that rose last week are linked to convertible bonds, which allow investors to gain from dramatic jumps in share prices but also pay a coupon like a traditional bond.<\/p>\n

\u201cWhen you have a stock going up, the convertible bond is going to capture a large part of the equity\u2019s rise,\u201d said Brillois. \u201cThe convertible bond will perform approximately 950% or 970% when the equity is doing 1000%.\u201d<\/p>\n

Two hedge fund investors who requested anonymity because they could not speak publicly about their positions said the market volatility also provided hedge funds with an opportunity to profit. They buy the convertible bonds of companies whose stock has soared and hedge their position by shorting the shares.<\/p>\n

\u201cThis (retail) development has spurred a whole group of funds to adopt that strategy,\u201d said a source who runs a U.S. hedge fund.<\/p>\n

That arbitrage strategy – which takes advantage of differences in price between the debt and equity – has been utilized by funds like CQS, AQR Capital Management, Man Group and Whitebox Advisors, among others.<\/p>\n

Last week\u2019s market mania \u201cbenefited the private equity firms or whoever owned the bonds greatly; it benefited the company because they don\u2019t have to pay back the debt, and it probably did not benefit whoever it was that was buying up that stock that hit crazy levels,\u201d said Todd Pulvino, co-founder of CNH Partners, an affiliate of AQR that trades convertible arbitrage.<\/p>\n

Gil Song, portfolio manager at Man GLG, said large, unexpected moves in stocks that benefit convertible arbitrage investors may become more common.<\/p>\n

\u201cGiven recent estimates of retail participation in the market having doubled in the past two years alone, one might infer increased volatility is here to stay for at least some time,\u201d said Song.<\/p>\n

Whitebox Advisors declined to comment and CQS did not respond to a request for comment.<\/p>\n

Funds that buy and sell both equity and debt have beenscouring the market for opportunities created by the retailbuying frenzy, said one fund source and a prime brokerage banker, who declined to be identified.<\/p>\n

Companies that have convertible debt outstanding and whose equity valuations have become over-inflated fit the criteria for investing. \u201cYou look for inefficiency in the pricing of the debtstructure,\u201d said one New York-based investor. \u201cWhen the equitygoes crazy, that creates an automatic opportunity to buy thedebt.\u201d Convertible bonds do come with risks, as they are often in speculative-grade companies. However, Joe Wysocki, a convertible portfolio manager at Calamos Investments, said \u201cregardless of what drives that stock – whether it\u2019s the technicals or the fundamentals – by owning a convertible you retain some of that upside participation.\u201d<\/p>\n

While the Reddit rally has shown signs of weakening, two of the largest exchange-traded funds that track the convertible market, the iShares Convertible Bond ETF and the SPDR Bloomberg Barclays Convertible Securities ETF, hit all-time highs on Friday morning.<\/p>\n

(Fixes grammar in headline, please read \u201cconvertible bonds\u201d instead of \u201cconvertible debt\u201d)<\/p>\n

Source: Read Full Article<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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