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The acceleration of corporate bonds made by hedge funds

Sommansson, Sara (2009)
Department of Law
Abstract
Hedge funds have been a part of the financial markets since the 1940's. However, it is only during the last decade that they have gained the status as one of the more influential players on this market. Today hedge funds enjoy great interest from both investors and regulators. There is not really a generally accepted definition of the term hedge fund. What characterizes them, and what might be the reason for why people consider them to be special and a little bit mysterious, is the freedom they have in the markets. Their characterizing features are among other things that they have different investment rules and that they are using more aggressive investment strategies. Examples of these aggressive investment strategies are the use... (More)
Hedge funds have been a part of the financial markets since the 1940's. However, it is only during the last decade that they have gained the status as one of the more influential players on this market. Today hedge funds enjoy great interest from both investors and regulators. There is not really a generally accepted definition of the term hedge fund. What characterizes them, and what might be the reason for why people consider them to be special and a little bit mysterious, is the freedom they have in the markets. Their characterizing features are among other things that they have different investment rules and that they are using more aggressive investment strategies. Examples of these aggressive investment strategies are the use leverage, short selling and investing in derivatives. The debate surrounding hedge funds has been constantly ongoing during the last couple of years. The fact that the hedge funds have been involved in a string of events that has gotten much attention from the mass media has only led to that the debate has increased even further. Lately, regulators have become more and more interested in the hedge funds. One aspect of the debate has therefore been whether or not the hedge funds should be allowed to keep their status as less regulated, or if more regulation is required, in order to reduce the market risks that some people believe the hedge funds to create. The hedge funds have often been criticized for being greedy and for using investment strategies that balances on the edge of what is legal and what is not. In this thesis I have chosen to look at the hedge funds engagement as holders of corporate bonds. Lately the activist hedge funds have used the bondholder's rights in order to increase the yield of the bond. Previously many violations of bondholder rights have passed unnoticed. This is something that has changed due to the way activist hedge funds enforce the rights of the bondholder. Unlike previous investors, hedge funds are actively seeking out bonds where the companies either have, or are on the verge of, violating their contractual obligations. As soon as they find such an opportunity, they will acquire bonds in these companies. The thesis is focused on the consequences of activist hedge fund activity in the corporate bond market. It investigates the rights of the hedge funds in the case of late filings made by bond issuers and the implications this has on the bond market and how indentures are written. The conclusion of the thesis is that hedge funds have a weak case against the bond issuer, but the rulings are not absolute. History has shown that companies don't want to risk a court ruling against them as well as litigation costs, resulting in issuers settling with the hedge funds outside of court. The risk of loosing a large sum of money if the court rules in favor of the hedge funds, is often one that the companies do not dare to take. The conclusion is that in order for this situation to be resolved, the language of the indentures needs to change. The thesis draws up a discussion on the subject. (Less)
Please use this url to cite or link to this publication:
author
Sommansson, Sara
supervisor
organization
year
type
H3 - Professional qualifications (4 Years - )
subject
keywords
Bankrätt
language
English
id
1562055
date added to LUP
2010-03-08 15:55:29
date last changed
2010-03-08 15:55:29
@misc{1562055,
  abstract     = {Hedge funds have been a part of the financial markets since the 1940's. However, it is only during the last decade that they have gained the status as one of the more influential players on this market. Today hedge funds enjoy great interest from both investors and regulators. There is not really a generally accepted definition of the term hedge fund. What characterizes them, and what might be the reason for why people consider them to be special and a little bit mysterious, is the freedom they have in the markets. Their characterizing features are among other things that they have different investment rules and that they are using more aggressive investment strategies. Examples of these aggressive investment strategies are the use leverage, short selling and investing in derivatives. The debate surrounding hedge funds has been constantly ongoing during the last couple of years. The fact that the hedge funds have been involved in a string of events that has gotten much attention from the mass media has only led to that the debate has increased even further. Lately, regulators have become more and more interested in the hedge funds. One aspect of the debate has therefore been whether or not the hedge funds should be allowed to keep their status as less regulated, or if more regulation is required, in order to reduce the market risks that some people believe the hedge funds to create. The hedge funds have often been criticized for being greedy and for using investment strategies that balances on the edge of what is legal and what is not. In this thesis I have chosen to look at the hedge funds engagement as holders of corporate bonds. Lately the activist hedge funds have used the bondholder's rights in order to increase the yield of the bond. Previously many violations of bondholder rights have passed unnoticed. This is something that has changed due to the way activist hedge funds enforce the rights of the bondholder. Unlike previous investors, hedge funds are actively seeking out bonds where the companies either have, or are on the verge of, violating their contractual obligations. As soon as they find such an opportunity, they will acquire bonds in these companies. The thesis is focused on the consequences of activist hedge fund activity in the corporate bond market. It investigates the rights of the hedge funds in the case of late filings made by bond issuers and the implications this has on the bond market and how indentures are written. The conclusion of the thesis is that hedge funds have a weak case against the bond issuer, but the rulings are not absolute. History has shown that companies don't want to risk a court ruling against them as well as litigation costs, resulting in issuers settling with the hedge funds outside of court. The risk of loosing a large sum of money if the court rules in favor of the hedge funds, is often one that the companies do not dare to take. The conclusion is that in order for this situation to be resolved, the language of the indentures needs to change. The thesis draws up a discussion on the subject.},
  author       = {Sommansson, Sara},
  keyword      = {Bankrätt},
  language     = {eng},
  note         = {Student Paper},
  title        = {The acceleration of corporate bonds made by hedge funds},
  year         = {2009},
}