Hedge Funds Find Arb Opportunity in SPACs
"Typically, it would be priced at $10 and trade at about $10," says Danics. "It wasn't a typical IPO where it's priced at $10 and can trade at $7."
Beginning in 2005, SPACs trading on the open market became flooded with funding from hedge funds and institutional investors. That boom ended as the financial crisis heated up last year -- creating a strange but immensely profitable scenario in an ordinarily sleepy market.
For example, recently an investor could purchase a share of Advanced Technology for $7.73, which carries an implied yield of 15.4% if held to maturity, according to investment bank Morgan Joseph. The maturity comes to pass in just over two months, when Advanced Technology is scheduled to submit a letter of intent on June 22. At that point, shareholders will vote on a deal, if announced, and be eligible to receive their portion of Advanced Technology's assets.
"SPACs became interesting because just like any of these kinds of closed-end funds, some of them are very compelling and trading at such huge discounts to net-asset value," says Andrew Schneider, managing partner and founder of HedgeCo Networks. "You can get in right now in some of these at 50%, 60%, 70% discounts to NAV -- even computed in a conservative fashion."But the SPAC window of opportunity may soon be closing. HedgeCo has consulted about 10 new hedge funds with $500 million in assets dedicated to SPAC arbitrage and other closed-end fund strategies. AQR Capital -- a Greenwich-based alternative investment firm with $20 billion under management -- is one such company, whose diversified arbitrage mutual fund launched in January.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV