Some hedge funds that sold protection on Bear Stearns two weeks ago spent the early part of this week buying up shares of the company in an effort to gather voting rights and ensure the merger with JPMorgan goes through. Hedge funds that sold protection on Bear Stearns when spreads reached around 1,000 basis points turned around and bought protection once spreads came back in on Tuesday to around 360 bps, explained one trader. This allowed them to pocket a risk-free profit.
As the merger moves closer, Bear’s CDS spreads should continue to tighten and eventually move in tandem to JPMorgan’s spreads. For this reason, sellers of protection have an interest in making sure the deal goes through by voting yes to the merger as shareholders. One banker was less convinced that this strategy would work because so much of the company’s shares are concentrated with a few people who have already said they do not plan to vote for the merger.