Deals started closing again, with 10 of our deals closing during March (13 deals, if you counted day 1 of April). This left us with a net cash position of ~22% in our portfolio, which we will redeploy into new transactions as we see desirable opportunities. This is the beauty of this strategy; it’s a self-liquidating portfolio, making it an incredible tool to use as a cash alternative or to help manage one’s own balance sheet. That’s how we use it, that’s how we intend it to be used, and that’s how we’ve geared the entire operation.
This is also what we mean when we say the strategy is highly liquid. Most other “liquid” strategies don’t naturally convert their positions into cash frequently. This is why we offer monthly liquidity to our investors – because we can actually cover the cash – and it’s one of the factors that lead us to thinking about merger arbitrage as a cash alternative strategy. Not meant to be a knock on illiquid strategies, but there should be a premium paid for excess liquidity like this.
To make this work, we must exhibit a few characteristics as managers, which we aim for daily:
• Maintain an even-tempered approach to change as news and disclosures are released.
• Take a statistical approach to underwriting the likelihood of deal completion.
• Diversifying risk with a portfolio of uncorrelated transactions.
This allows us to incur losses in some transactions (which invariably happens, and sometimes in clusters) without risking a significant portion of our equity base, which gives us peace of mind at night and allows us to sleep well, knowing that our wealth is protected for tomorrow.
RESULTS
During the month of March, our gross returns were positive at +0.79%, with a net return of +0.71% for the month, bringing our year-to-date net return to (2.18)%. Most notably for the month, the SOVO transaction was completed after certifying substantial compliance with regulators and the HARP transaction was among the list of deals completed. Both of these transactions were in our Top 10 Downside % of AUM list at various times, with SOVO being one of our largest risk exposures at the end of January. It’s good to see them close as expected.
In the SOVO transaction, the companies received a request for additional information from the FTC back in October. At that time, we doubled our position from ~2% of AUM to ~5% of AUM, holding this level of exposure until the days leading into March. We sold some of our shares after the stock price inched up closer to the deal price, reducing our risk related to a late-stage FTC complaint in response to the companies’ certified compliance.
Although it’s been a tough start to the year, we remain steadfast in our approach to merger arbitrage as a strategy. For those of you who demonstrate the precautionary motive laid out by Keynes a century ago, we think this strategy will continue to be a great fit going forward.
If you’d like to have a conversation, please feel free to reach out.
“Great things are done by a series of small things brought together.” – Van Gogh
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