As MicroStrategy (MSTR) continues to buy into Bitcoin (BTC-USD), it is interesting to look at where the company is getting the money to spend on cryptocurrency. According to an exclusive Bloomberg report, part of the funding is coming from retail investors, while a significant portion is coming from hedge funds. Let’s explore how and why hedge funds are long on MSTR.
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Hedge Funds Are Buying MSTR Convertible Notes
Hedge funds like Calamos Advisors have been prominent participants in MicroStrategy’s bold financial moves this year. The hedge fund, along with other investors, has bought into over $6 billion of convertible notes issued by the company to fund its growing cryptocurrency portfolio. These convertible notes are being used by hedge funds like Calamos in market-neutral arbitrage strategies to capitalize on the rising volatility of the underlying asset.
Calamos holds more than $130 million of MicroStrategy notes across long and arbitrage strategies. According to Bloomberg, other hedge funds besides Calamos that have bought MSTR’s convertible notes include Linden Advisors, Context Capital, Graham Capital, and Millennium Management.
What Is a Hedge Fund’s Convertible Arbitrage Strategy?
When it comes to MSTR, hedge funds are employing a convertible arbitrage strategy. This strategy involves going long (buying) on a company’s convertible securities and shorting (selling) its stock futures to profit from price differences between the two financial instruments.
Earlier this year, MicroStrategy unveiled plans to raise $42 billion through a combination of equity and fixed-income securities. Since then, the company has acquired $13.5 billion worth of Bitcoin and issued $3 billion in zero-interest convertible notes, its fifth such offering this year. Convertible notes are a type of debt instrument that allow the holder of the note to convert this instrument into equity at a predetermined time in the future.
How Are Hedge Funds Employing this Strategy?
After MSTR unveiled its plans to raise $42 billion, the company issued convertible long-term notes, with $7 billion of these notes now outstanding. Hedge funds have adopted these instruments for convertible arbitrage, leveraging the notes’ exchange feature as an equity option tied to stock volatility. Considering that MSTR stock has moved by 5.2% on a daily basis on an average, this strategy has proven to be particularly lucrative for hedge funds.
Is MSTR a Good Stock to Buy?
Analysts remain bullish about MSTR stock, with a Strong Buy consensus rating based on unanimous eight Buys. Over the past year, MSTR has skyrocketed by more than 500%, and the average MSTR price target of $494 implies an upside potential of 21.7% from current levels.
