$7 Billion MicroStrategy Convertible Notes Get Arbitrage From Hedge Funds

Key Points:

• Co-founder Michael Saylor has shifted MicroStrategy’s focus to Bitcoin, amassing $40 billion worth.
• Hedge funds and investors have utilized MicroStrategy convertible notes for arbitrage strategies.

According to Bloomberg, Michael Saylor, co-founder of MicroStrategy, has capitalized on surging demand from retail investors and hedge funds alike, driven by the company’s staggering 500% stock rally this year.

Read more: MicroStrategy Bitcoin Investment Yields Over 38% in November 

Hedge Funds Leverage Volatility with MicroStrategy Convertible Notes

At the heart of this growth is Saylor’s audacious strategy of accumulating Bitcoin, now valued at approximately $40 billion, and leveraging it to redefine MicroStrategy‘s trajectory.

Since October, Saylor has doubled down on his cryptocurrency-focused shift, announcing plans to raise $42 billion over three years with a mix of equity and fixed-income securities.

In a little more than a month, the company amassed $13.5 billion of Bitcoin and sold $3 billion of zero-interest convertible notes, its fifth bond offering this year. Long-term debt, which totals more than $7 billion, can be converted to equity if MicroStrategy’s stock exceeds certain thresholds.

Convertible arbitrage has been a very popular hedge fund strategy. Firms such as Calamos Advisors, AQR Capital Management, and Man Group have used MicroStrategy convertible notes for market-neutral trades, exploiting extreme volatility in MicroStrategy’s stock, which has averaged daily swings of 5.2%, compared with 0.6% for the S&P 500.

Risks Loom Amid MicroStrategy’s High-Stakes Approach

In addition, Calamos co-Chief Investment Officer Eli Pars called convertibles a way for the issuers to monetize the stock volatility. His firm is holding more than $130 million in MicroStrategy convertible notes for long and arbitrage strategies.

These positions are hedged, but there is still risk. The company’s credit profile is inextricably linked to Bitcoin, arguably the most volatile asset class there is, and Saylor’s unorthodox strategy continues to raise eyebrows. Nevertheless, MicroStrategy’s at-the-market stock offering program has continued to grease the wheels of its balance sheet and keep investors fascinated with its high-risk, high-reward strategy.