MicroStrategy has sold over $6 billion in convertible notes to buy Bitcoin this year, and hedge funds buy it for arbitrage bets

Eli Pars, co-chief investment officer at Calamos Advisors LLC, was one of the buyers of more than $6 billion in convertible notes MicroStrategy has sold this year to keep expanding its bitcoin reserves. Like many other managers, Pars uses the notes for market-neutral arbitrage bets, taking advantage of wild swings in the underlying asset. “Convertibles are a way for issuers to monetize equity volatility, and MicroStrategy is an extreme example,” said Pars, whose firm holds more than $130 million in MicroStrategy notes, both in long and carry strategies. Since Oct. 31 alone, MicroStrategy has bought about $13.5 billion in bitcoin and issued $3 billion in zero-interest convertible notes, its fifth bond offering this year. These low-interest, long-term notes, which can be exchanged for shares if the stock price rises above a certain level, now have more than $7 billion outstanding. Hedge funds bought the notes to deploy their own convertible arbitrage strategies, which firms such as AQR Capital Management and Man Group have implemented elsewhere. It is one of the hottest strategies on Wall Street this year. “The deal is attractive because the implied volatility of convertible bonds is much lower than realized volatility or option implied volatility,” Pars said, adding that even in the convertible bond space, MicroStrategy is a “very rare opportunity,” especially given the size and volume of the offering. “Our job is to connect traditional capital markets, which need bonds, fixed income, equities or options, and we combine those markets with the crypto economy and use Bitcoin to do that,” MicroStrategy founder Michael Saylor said in an interview with CNBC. (Bloomberg)