Hedge Funds Are the Natural Other Side of Your Trades...They Buy High...

How do the convertible arbs help you make money? Simple, really. They are usually buyers when you want to sell, and sellers when you want to buy. They like to buy high-dollar-price, low-premium convertibles just when you, as a devotee of the protected stock-picking approach to convertibles, are turning seller. Remember that bond you bought around 90 or 100? They want to buy it from you at 130 or 140. The competition among them assures you of getting a fair price, a fair premium for your bonds. Because these higher-dollar-price bonds are relatively easy to hedge with stock, they fit the needs of the arbs.

So if protected stock picking is your game, hedge funds provide liquidity when it’s time to sell. When you want to play prospering by surviving, though, it works in reverse: The hedge funds sell to you, and their willingness to take quick profits means you can buy right.