Are ETFs the Ultimate SPAC Wrapper
At the time of this writing, there were over 400 SPACs searching for merger targetsThe amount of...
Investors are challenged to navigate the uncertainty and volatility in today’s market. This should come as no surprise to any investor given the global geopolitical risks, supply chain disruptions, the uncertainty around central bank(s) tightening, inverted yield curves, spiking inflation at 40 year highs, and so on. It is during these uncertain times that having an uncorrelated, all-weather strategy that can help protect your clients’ assets, while also offering upside participation becomes increasingly important to an overall portfolio. This is precisely the environment when absolute return focused strategies may “earn their keep”.
While there are many types of strategies that fall within the absolute return bucket (M&A Arbitrage, long/short, market neutral, etc.), we focus on a unique strategy that we believe offers superior risk versus return characteristics. That is investing in Pre-Merger SPACS, perhaps more commonly known as “SPAC Arbitrage”. While SPACs have seen a slew of negative headlines as of late, Pre-Merger SPACs have actually continued to serve as a relatively safe haven amongst hedge funds and savvy investors alike.
SPAC Arbitrage provides exposure to pre-merger SPACs given their attractive asymmetric risk adjusted returns, downside risk mitigation, equity-like capital appreciation potential, and uncorrelated nature to stocks and bonds.
SPAC Arbitrage is an absolute return strategy that consists of two key value drivers (yield and equity-like optionality).
The yield component is comprised of the interest earned on collateral (untouched capital raised at IPO) that must be invested in risk-free T-Bills and the discount a SPAC is purchased at relative to trust value (NAV). The combination of the interest earned plus the discount allows the strategy to generate positive returns/yields regardless of overall market direction. A key feature of SPACs is that regardless of whether a target company is identified or not, the end investor always has the right to redeem shares for trust value (NAV).
The second driver of performance associated with SPACs is the equity-like optionality. This relates to the capital appreciation opportunity that an investor can earn in addition to the yield on the trust account. When a SPAC announces a merger target that the market finds attractive, the price can appreciate meaningfully higher than NAV as new investors bid up the price. When this occurs, investors can sell in the open market to lock in additional gains beyond the expected yield bogey. This potential equity-like optionality has the ability to meaningfully increase expected returns as we saw in 2020 and early 2021. An interesting part of the SPAC arbitrage is that the core return of the structural arbitrage if not dependent on the quality of the companies selected by the SPAC sponsors for the merger. Rather, we harvest gains from the trust, and then have the opportunity to actively decide which companies to support by holding the warrants. We also add value by actively acquiring SPAC positions in the markets when the price is below the trust value.
Given the heightened discussion around inflation and rising rates, it makes sense to highlight that SPACs not only help provide a hedge protection from rising rates, but may also offer greater return potential as interest rates rise. The reason for this is that SPAC proceeds held in trust must be invested in T-Bills and any interest earned must be distributed to shareholders when shares are redeemed. As we continue to embark on a Fed tightening cycle, it should not be surprising to see short term T-Bill rates increase, thus the interest earned in trust will increase as well (rising rates increases the yield value driver component of SPACs). A combination of higher interest earned in trust and the ability to purchase SPACs at a discount to trust creates a rather compelling absolute return opportunity in the current environment.
We believe SPAC arbitrage has long offered investors stable, uncorrelated return potential for their portfolios. This coupled with the relatively low probability of loss if held to maturity provides investors a much needed solution in an uncertain market environment.
For those investors who may be interested, Robinson Capital offers this strategy in both an ETF - Robinson Alternative Yield Pre-Merger SPAC ETF (SPAX) and via a separately managed account.
EXPLORE SPAX at www.robinsonetfs.com
ABOUT ROBINSON CAPITAL
Founded in December 2012, Robinson Capital Management, LLC, is an independent investment advisor specialized in developing traditional and alternative fixed income solutions. Robinson’s investment approach employs both fundamental and value techniques to best identify positive risk/reward opportunities and to maintain a consistent and disciplined approach. Robinson Capital also specializes in alternative value investing strategies, particularly through special purposes acquisition companies (SPACs) and closed-end mutual funds (taxable and tax-exempt).
Robinson Capital provides customized investment management services for RIAs, family offices, broker-dealers and institutions.
The firm serves as investment sub-adviser to the Robinson Alternative Yield Pre-Merger SPAC ETF (ticker: SPAX). For more information, visit, robinsonetfs.com.
Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, click here. Read the prospectus or summary prospectus carefully before investing.
Investing involves risk. Principal loss is possible. ETFs may trade at a premium or discount to their net asset value. Brokerage commissions are charged on each trade which may reduce returns.
The Fund invests in equity securities and warrants of SPACs, which raise assets to seek potential business combination opportunities. Unless and until a business combination is completed, a SPAC generally invests its assets in U.S. government securities, money market securities, and cash. Because SPACs have no operating history or ongoing business other than seeking a business combination, the value of their securities is particularly dependent on the ability of the entity’s management to identify and complete a profitable business combination. There is no guarantee that the SPACs in which the Fund invests will complete a business combination or will be profitable.
Some SPACs may pursue a business combination only within certain industries or regions, which may increase the volatility of their prices. To the extent a SPAC or the fund is invested in cash or cash equivalents, this may impact the ability of the Fund to meet its investment objective. Investments in a SPAC may be considered illiquid and subject to restrictions on resale.
The Fund may purchase warrants to purchase equity securities. Investments in warrants are pure speculation in that they have no voting rights and pay no dividends. They do not represent ownership of the securities, but only the right to buy them. Warrants involve the risk that the Fund could lose the purchase value of the warrant if the warrant is not exercised or sold prior to its expiration. The Fund may also purchase securities of companies that are offered in an IPO. The risk exists that the market value of IPO shares will fluctuate considerably due to factors such as the absence of a prior public market, unseasoned trading, a small number of shares available for trading and limited information about the issuer. Such investments could have a magnified impact on the Fund.
Some sectors of the economy and individual issuers have experienced particularly large losses due to economic trends, adverse market movements and global health crises. This may adversely affect the value and liquidity of the Fund’s investments especially since the fund is non-diversified, meaning it may invest a greater percentage of its assets in the securities of a particular, industry or sector than if it was a diversified fund. As a result, a decline in the value of an investment could cause the Fund’s overall value to decline to a great degree.
The Fund is a recently organized management investment company with limited operating history and track record for prospective investors to base their investment decision.
The Fund is distributed by Foreside Fund Services, LLC.
Jon Browne is the Portfolio Manager and member of the investment management team at Robinson Capital. He jointly oversees the day-to-day management of the Robinson Funds, including its investment strategies and processes, risk management, regulatory compliance, asset allocation modeling, external manager due diligence and selection, and trading. He is also responsible for overseeing the continued growth and advancement of the firm’s CEF and SPAC research efforts, which includes managing Robinson Capital’s proprietary valuation systems.