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Hedge funds increase their short positions of Pacific Ethanol (PEIX) as part of convert arb play

Sep. 29, 2010 11:21 AM ETALTO
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Hedge funds borrowed and shorted an additional 700,000 shares of PEIX over the past week. The borrowing cost increased as well, from 1100 bps to 1600 bps.

Pacific Ethanol announced last week that it was issuing $35 million of convertible notes so the hedge funds that are shorting the equity are most likely going long the convertible.

PEIX's share price jumped last week after the announcement that the company would raise cash with not only the convertible issue but also the sale of its interest in Front Range Energy.

The chart below shows in the increase in number of shares borrowed and shorted and the rising cost-to-borrow in the stock loan market.

Furthermore, 96% of institutional investors available shares are currently out on loan. So funds that are not already short may find it impossible to borrow shares and funds that are already short need to be careful of a squeeze.

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