III. Nontraditional Institutional Investors

For too long, convertibles have been the province of investors given the mandate to invest exclusively or at least primarily in the asset class. This has led to a forest/trees problem wherein attractive situations—individually or marketwide—go begging for buyers because everyone knows the bonds are for sale and nobody wants to take the risk of going against the conventional flow.

We Can’t Go On Together with Suspicious Minds

Traditional equity accounts have long mistrusted the dealings of their convertible brethren. One frequent cause relates to the stock “prints,” or large trades, that frequently accompany convertible transactions. For convertibles with any meaningful equity sensitivity, it’s very unusual for bonds to trade out of one unhedged account into another. Far more frequently, the trades involve at least one hedge fund. Thus, in names with outstanding convertibles, you’ll frequently see large stock prints connected with a convertible. If, for example, one hedge fund buys a convertible from another, there will be an offsetting trade in the stock, with the hedge fund that buys the bonds also selling common shares to the fund that’s unwinding a long convertible/short stock position. Traditional institutional traders needing to buy or sell the underlying stock frequently express confusion and annoyance when they see that even though a big piece of stock is on the tape, they were unable to transact. Even though the trade is entirely legitimate, market participants generally unfamiliar with converts usually end up grumbling about the mysterious prints in ....