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Investing in Hedge Funds, Revised and Updated Edition by Joseph G. Nicholas

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CHAPTER 6
Convertible Arbitrage
CONVERTIBLE ARBITRAGE involves taking a long security position and hedging market risk by taking offsetting positions, often in different securities of the same issuer. A manager may, in an effort to capitalize on relative pricing inefficiencies, purchase long positions in convertible securities, generally convertible bonds or WARRANTS, and hedge a portion of the equity risk by selling short the underlying common stock. A manager may also seek to hedge interest-rate or credit exposure under some circumstances. For example, a manager can be long convertible bonds and short the issuer’s underlying equity, and may also use futures to hedge out interest-rate risk or credit default swaps to hedge default risk. Timing ...

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