Distressed Securities

Cerbero, fiera crudele e diversa, con tre gole caninamente latra sovra la gente che quivi e sommersa. Li occhi ha vermigli, la barba unta e atra, e 'l ventre largo, e unghiate le mani graffia li spirti ed iscoia ed isquatra. Dante Alighieri, Inferno, Canto VI, verse 13-18 Translation by H.W. Longfellow Cerberus, monster cruel and uncouth, With his three gullets like a dog is barking Over the people that are there submerged. Red eyes he has, and unctuous beard and black, And belly large, and...

Hedge Fund Investment Strategies

Hedge funds invest in CDOs with three different strategies 2. Long short structured credit These strategies enable hedge fund managers to express certain views on credit markets efficiently. This is the easiest and riskiest CDO strategy and consists of buying the equity tranche of CDOs. The return generated by the equity tranche depends on the leverage, the maturity and the composition of the basket of credit forming the CDO. Purchasing CDO equity tranches is equal to selling credit protection....

Capital Structure Arbitrage

Convertible Bond Deal Structure

Investors segment financial instruments and specialize in single chunks of corporate capital structures, thus giving rise to inconsistencies in the relative valuations of the different parts making up the capital structure. This can turn into profit opportunities for traders who can move freely among the various constituents of the capital structure. Merton's model2 interprets equity and bonds as different types of options having the value of a company as underlying. Shareholders own the...

Share Class Arbitrage

Share class arbitrage is a special kind of arbitrage on a company's capital structure, for example, the arbitrage between saving shares, preferred stock and common stock. Let's take a closer look at the differences between the various classes of stock. Common stock does not provide shareholders with any privilege with regard to dividend distribution or asset allocation in case of business liquidation. Preferred stock provides shareholders with a prior claim on dividends and capital refund in...

Brief History Of Convertible Bonds

The first convertible bonds were issued in the 19th century as a sweetener to arouse the interest of investors in railway construction in the United States. For example, the railway company Chicago, Milwaukee amp St. Paul Railway resorted to many convertible bond issues between 1860 and 1880. After some twenty years of absence, at the beginning of the 20th century other convertible bonds started to be issued again by other railway companies, for example in 1901 a 15 million issue by Baltimore...