The Hedge Fund Report: Another One for the Masses

Johnson doubts that will happen and therefore does what is called a buy-write. He buys the equity and increases his overall return by selling in-the-money calls on the stock. On Friday, he bought the stock at $36.56 and sold March $35 calls for $1.95.

This trade gives him downside protection if speculation about another bidder subsides. As long as the stock stays above $35, the trader is in the money and should be able to generate a roughly 10% annualized return. Johnson doesn't see the deal falling apart before March 17, and that means that he is confident that the stock price will stay above $35. If another bidder surfaces, he is still in the money.

What he is really giving up is participation in the possible upside.

There are many ways to play this trade, he says, and it all depends whether one assumes a counter-bid is coming or not. Those who don't are doing just what Quixote does: buying the equity and writing calls. The other camp buys either the stock or the calls and hopes for another bidder.

Continental Shift

The European exchanges are in consolidation frenzy, and hedge fund pressures can't be ignored. But will they rule the outcome?

The most recent development is Atticus Capital and British hedge fund TCI raising their stakes in Euronex to 9.1% and 8.4%, respectively. Euronext was formed by the merger of the Paris, Brussels and Amsterdam exchanges.

The hedge funds are pushing for a merger between Euronext and Deutsche Boerse, because they own significant stakes in both. But getting a deal done isn't easy. Euronext and Deutsche Boerse have huge derivative operations, and their merger may raise antitrust issues with the European Commission.

Traders continue to defect Wall Street for hedge funds. Ben Bram, who oversaw Goldman Sachs'(GS Quote) equity trading in the health care sector, joined $1 billion Touradji Capital Management; Samuel Joab in Europe left Merrill Lynch(MER Quote) to be part of a new pan-European equity long/short team at $6.4 billion Greenwich, Conn.-based FrontPoint Partners; and Centaurus Capital poached Lehman Brothers'(LEH Quote) investment banker Benoit D'Angelin to manage a credit and special-situation portfolio.

Good Turnout

So far this year, 962 hedge funds have signed up as investment advisers with the Securities and Exchange Commission following enactment of a new rule requiring registration. The additions bring to 2,131 the number of funds that are now registered, including outfits that took the plunge prior to this year, says Robert Plaze of the SEC's Investment Management Division.