Hedge Funds Find Arb Opportunity in SPACs
Thomas Kirchner invests in SPACs as manager of the Pennsylvania Avenue Event-Driven Fund, and noted the trend in his blog in January. Kirchner says opportunities have largely disappeared, as dollars chasing the strategy exceed the opportunities, especially with fewer funds available to invest in.
"You could buy SPACs last year at 15% discounts to their liquidation values," Kirchner says in an email. "Now, you're lucky to get annualized returns of more than 5% on that strategy."
Still, the strategy hasn't gotten as much attention as another popular arbitrage strategy that hedge funds have been using, which involves bets on the debt and equity of major financial institutions like Citigroup (C), AIG (AIG), Bank of America (BAC), Wells Fargo (WFC) and JPMorgan Chase (JPM). But some top SPACs like Victory Acquisition Corp. (VRY), Triplecrown Acquisition Corp. (TCW) and Liberty Acquisition Holdings Corp. (LIA) have received more liquidity as more funds became interested in the trade.
The trend has rendered SPAC warrants nearly worthless, leaving investors with dwindling opportunities to buy SPAC shares at big discounts. With all the sideline cash flooding into the relatively small market, it may not be long before yields shrink to nil."At some point," says Tina Pappas, a managing director at Morgan Joseph, "arbitrage opportunity disappears when everyone finds out about it."
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 Plus 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