Hedge Funds Make MicroStrategy Wall Street’s Hottest Trade


(Bloomberg) — To sate his multibillion dollar rampant appetite for Bitcoin, Michael Saylor has tapped demand from retail investors transfixed by MicroStrategy Inc.’s more than 500% rally this year. He’s also benefitted from hedge funds who care far less where the stock trades.

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Calamos Advisors LLC co-Chief Investment Officer Eli Pars has been among the buyers for more than $6 billion of convertible notes sold by MicroStrategy this year to finance the purchase of his ever-expanding cryptocurrency hoard. Like many other managers, Pars uses the notes in market-neutral arbitrage bets that exploit the surging volatility of the underlying asset.

“Convertibles are a way for issuers to monetize the volatility of their stocks, and MicroStrategy is an extreme example,” said Pars, whose firm owns more than $130 million of MicroStrategy notes in both long and arbitrage strategies.

Co-founder Saylor has accumulated Bitcoin now worth around $40 billion over the past four years after deciding that the tiny enterprise software maker needed to embark on a different path to survive. He accelerated the strategy shift in October by announcing plans to raise $42 billion over the next three years through an evenly split combination of equity and fixed-income securities. Since Oct. 31 alone, MicroStrategy has bought about $13.5 billion in Bitcoin and issued $3 billion in zero-interest convertible notes, the firm’s fifth bond offering this year.

Convertible Arbitrage

These low-interest, long-term notes, with more than $7 billion now outstanding, can be exchanged for equity if the stock price rises above certain levels. Hedge funds are buying them to deploy their own version of a convertible arbitrage tactic already being done elsewhere by the likes of AQR Capital Management and Man Group. It has been one of the hottest strategies on Wall Street this year.

While flavors of the tactic vary, convertible arbitrage traders generally use hedges to isolate the exchange feature of the notes and treat it as an equity option whose value is tied to the stock’s volatility. The more the stock swings, the more profitable the trade becomes — and MicroStrategy has been nothing if not turbulent. This year MicroStrategy has posted an average daily move of 5.2% in either direction, compared with 0.6% for the S&P 500 Index.

The shares jumped 8.7% on Wednesday in New York, as Bitcoin approached a record high of almost $100,000.



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