The Next Hedge Fund Scandal

Patrick Boyle On Finance

What is the latest free money for Wall Street Hedge Funds? SPAC Arbitrage, which is an investment strategy that seeks to acquire shares or units of a special purpose acquisition company (“SPAC”) at or below its net asset value (“NAV”) in order to generate a return through either:
An exit at a premium to NAV once the SPAC announces a business combination
An exit at NAV, being the IPO price plus accrued interest, while keeping the SPAC Warrant
Izzy Englander’s Millennium Management increased its investments in blank-cheque companies almost six-fold last year as hedge funds poured tens of billions of dollars into Wall Street’s hottest investment product.
The New York-based group, which has $47bn under management, had $4.4bn invested in special purpose acquisition companies as of December, up from $750m at the end of 2019, making it the top hedge fund buyer of such vehicles, according to data compiled by Spac Research.
Hedge funds have embraced Spacs because they see the investments as having limited risk — and huge potential upside. Early backers can park cash in the vehicles for up to two years, accumulating interest, while receiving warrants that can be converted into relatively low-priced shares once a blank-cheque company merges with another business.
Chamath Palihapitiya has launched six SPACs on his quest to bring SPACs with tickers IPOA to IPOZ to market. Three of the SPACs have completed deals, one has a pending merger and two are still searching for targets. He has registered with the SEC to launch seven more in 2021.
Palihapitiya has also been involved with six SPACs as a member of the private investment in public equity, commonly referred to as the PIPE.
The investor tweeted last Friday to “trust the process” after a short report from Hindenburg Research attacked his recently completed SPAC deal Clover Health Investments (NASDAQ: CLOV).
A sober look at Spacs by Michael Klausner, Michael Ohlrogge and Emily Ruan: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3720919
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