Long-only fund managers will adopt hedge fund techniques, says DB researcher

Many arbitrage techniques currently used by hedge fund managers will move into the long fund community, according to Leigh Baxandall, global head of equity derivatives strategy at Deutsche Bank in London.

“There are opportunities there for return enhancement using hedge fund techniques,” Baxandall told an audience of investors at a Deutsche Bank-hosted equity derivatives conference in London today.

Baxandall highlighted a number of arbitrage and return enhancement techniques, including convertible arbitrage, statistical arbitrage and merger arbitrage. He gave the example of “scrip dividend enhancement”, which attempts to take advantage of the fact that a number of European stocks give shareholders the option of ‘electing stock’ – acquiring more equity – rather than taking a cash dividend.

Where the terms of the stock election are determined prior to the deadline for stock election, shareholders effectively own a call option, said Baxandall. “There is value in this call option,” he said, adding that this can either be monetised directly using the over-the-counter options market or locked in through the sale of stock at some point up to the election deadline.

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