In today’s world of 0% risk-free rates (or less), investors face the difficult choice of either protecting themselves against worst-case scenarios but in turn accepting no return (and much opportunity cost), or of making choices designed to generate at least some return, but in doing so accepting significant potential losses if all goes wrong. SPAC+ is an actively managed strategy designed around the incredibly unique attributes of pre-combinations SPACs – investors are protected on the downside by T-bill collateral but can generate upside through embedded equity options – to help everyday investors solve this difficult portfolio problem. We believe it can improve risk/return in investors’ portfolios.
As an example of how these drivers come together to add value, at the end of 2020 the average price of a common share in the SPAC+ portfolio was $10.26 and the average price of a unit in the portfolio was $10.72, and the fund was at 1.45x leverage. At the end of March 2021, the average common price had declined to $9.81 and the average unit price had declined to $9.95, down 4.39% and 7.11% respectively, and the fund was at 1.63x leverage. Despite the significant price declines of the inventory on a levered portfolio, SPAC+ was up +8.45% year to date through March 2021. Moreover, in the absolute worst case scenario of a market downturn where no more SPAC mergers are ever completed, the SPAC+ Fund would only lose 1.5% after waiting and collecting the share of the collateral of all the positions held in T-bills.10 This absolute downside compares favourably to other equity or credit-related products, which would likely face much steeper drawdowns. The strategy of the SPAC+ Fund may improve risk-adjusted returns to investors’ portfolios, while reducing tail risk in a bad event.
The investor scrabble to deal with close to zero interest rates has been going on for more than a decade. The result is the yields available in every asset class have contracted considerably over that time. It is a measure of how desperate investors are for a fixed income-like return that making 8.45% on leverage of 1.69 is considered a bargain.Click HERE to subscribe to Fuller Treacy Money Back to top