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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: forceOfHabit who wrote (56290)	9/13/2006 5:26:56 PM
From: YanivBA	Read Replies (1) \| Respond to of 116555

a standard hedge fund debt/equity strategy is, for company's with reasonable default risk, to go long the debt and hedge it with a short position in the stock (or buy puts). You say it is a standard debt/equity strategy. Any idea way this trade works (on normal conditions)? This is going to have everybody scrambling to rewrite the bond documentation....but how? I think bond holders would find the idea of a rewrite a little offensive. I think things can get pretty complicated because of problems in the CDS market. It is a market made of quants all trading their models one against the other. Unfortunately I believe a large portion of them do not account well for downturn default correlation and counter party risk and do not account at all for over saturation risk. The problem is that when a CDS contract goes down in value because of buy side realization of the above problems a large number of the models are showing that stock prices should go up due to smaller default risk. This is the kind of twisted thought mode that would only come to an end upon real life defaults. Here are some of my CDS market posts: Message 22768441 Message 22698922 Message 22701952 Message 22706008 Message 22708427 Message 22708694 Message 22687533 Message 22612109 Message 22612109 YanivBA.