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Hedge Funds Find Arb Opportunity in SPACs

In a fact sheet about the fund, which engages in several arbitrage strategies, AQR outlined plans to take advantage of a lack of liquidity in the "thinly traded" SPAC market. A spokesman for AQR says the firm is not concerned that it missed the height of the market last fall, since it expects attractive risk-adjusted returns for some trades.

One investor in the fund, Lee Munson, was excited about the prospects, and the fact that AQR's fees -- which are capped at 1.5% for Class-N shares and 1.2% for Class-I shares -- are much lower than the huge costs assessed by hedge funds when markets were booming.

" I love it because there's none of this two-and-20 crap," says Munson, referring to the 2% management fee and 20% performance fee that hedge funds were known for charging.

Another question lingers for SPAC returns: Whether the M&A and IPO markets will recover any time soon. Schneider says about 740 SPACs trade on the market today, but new launches have slumped significantly as M&A activity seized up amid a lack of financing last year. Most of the few deals announced were voted down by SPAC shareholders. They preferred to reclaim original investments, rather than take a chance of loss in the IPO market.

The result was a downward trend in SPAC launches, which started climbing in 2005. That year, the number of launches more than doubled from 12 to 28, and average gross proceeds climbed from $485 million to $2.11 billion, according to SPACAnalytics.com. The market reached a height of 66 SPACs and average gross proceeds of $12.09 billion in 2007, but has since come crashing down to 17 launches and $3.84 billion in proceeds last year.

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