short sell

问题如下：

Yankel Stein is the chief investment officer of a large charitable foundation based in the United States. Although the foundation has significant exposure to alternative investments and hedge funds, Stein proposes to increase the foundation’s exposure to relative value hedge fund strategies. As part of Stein’s due diligence on a hedge fund engaging in convertible bond arbitrage, Stein asks his investment analyst to summarize different risks associated with the strategy.

Describe how each of the following circumstances can create concerns for Stein’s proposed hedge fund strategy:

i. Short selling

ii. Credit issues

iii. Time decay of call option

iv. Extreme market volatility

选项：

解释：

Short selling: Since Hedge Fund 1 employs a convertible arbitrage strategy, the fund buys the convertible bond and takes a short position in the underlying security. When short selling, shares must be located and borrowed; as a result, the stock owner may want his/her shares returned at a potentially inopportune time, such as during stock price run-ups or when supply for the stock is low or demand for the stock is high. This situation, particularly a short squeeze, can lead to substantial losses and a suddenly unbalanced exposure if borrowing the underlying equity shares becomes too difficult or too costly for the arbitrageur.

Credit issues: Credit issues may complicate valuation since bonds have exposure to credit risk. When credit spreads widen or narrow, there would be a mismatch in the values of the stock and convertible bond positions that the convertible manager may or may not have attempted to hedge away.

Time decay of call option: The convertible bond arbitrage strategy can lose money due to time decay of the convertible bond’s embedded call option during periods of reduced realized equity volatility and/or due to a general compression of market implied volatility levels.

Extreme market volatility: Convertible arbitrage strategies have performed best when convertible issuance is high (implying a wider choice among convertible securities as well as downward price pressure and cheaper prices), general market volatility levels are moderate, and the liquidity to trade and adjust positions is sufficient. Extreme market volatility typically implies heightened credit risks. Convertibles are naturally less-liquid securities, so convertible managers generally do not fare well during such periods. Because hedge funds have become the natural market makers for convertibles and typically face significant redemption pressures from investors during crises, the strategy may have further unattractive left-tail risk attributes during periods of market stress.