Fund arbitrage is a method of attaining risk-free or low risk profit like most arbitrage strategies where the arbitrageur buys a fund whose net current asset value exceeds its capitalization, and shorts the underlying assets within its holdings. The arbitrageur waits until a logical parity is realized, meaning a convergence in market and asset values, or iniates a controlling position and requests immediate liquidation of the company's portfolio holdings.
Pershing Square Capital Management which is managed by famed investor Bill Ackman currently trades at $25.16, an almost 40% discount from its NCAV. The fund's performance this summer and throughout the pandemic was outstanding with asset values increasing 150% owing greatly to its acquisition of credit default swaps for corporate debt preceding the lockdown in March. A persistent concern to consider is the possibility that its trading price may further diverge from its NCAV as fund arbitrage assumes market value is inextricably linked to asset value which is often false contemporarily. Though it is very unlikely that Pershing Squares discount to NCAV will remain in light of its recent performance and SPAC deals.
No comments:
Post a Comment