Efficiently Inefficient #15 : Event Driven Investments (Last Installment)

Going through this books slowly has certainly aided my attempts to be a better investor. I have some academic basis to the leverage portfolios that I am currently building and am beginning to see the benefits of at least starting a new portfolio involving momentum next year after completing my leveraged portfolio. Hopefully, I would have finally mastered the science and personal courage of shorting counters using CFDs.

This late installment is about event driven investing. 

When you engage in event drive investing, you are not really profiting from the direction of the markets but from an event taking place. Executed properly, a great events driven investor can have returns that are uncorrelated with the markets.

a) Merger Arbitrage

This is a bet on a merger and acquisition actually taking place. A really exciting opportunity which happened recently was when Croesus RTrust was about to be taken private. The offer was made at around $1.17 with a potential dividend of about 0.04cts. 

When the offer was declared, a lot of investors took their money off the table as they have already made a decent 10-15% from the announcement. This actually brought the price to $1.165 the next day. This was a mouth watering deal for the merger arbitraguer. There is a 4.5 cts gain if the taking private of the counter succeeds once we include a 4+ cts dividend was declared. This is a 3.86% return which can be consummated in 3-4 months or annualised close to about 10%+ per year. A savvy investor might be able to buy this on margin and leverage at 300% to lock in an annualised return of 30%. 

This can be stressful way to invest and risk-sizing and I'm glad that some amount of legal knowledge on delisting and merger and acquisitions can come in useful when dealing with merger arbitrage investing

b) Distressed investments

I expect a new class of hedge funds to emerge in Singapore that may specialise in distressed securities investing. We've recently reformed our insolvency regime to become more similar to that of the US. One feature is the introduction of debts with super-priority that allows a creditors to lend money safely to distressed firm to assist them in recovery while gaining priority over creditors if the company would somehow fail to be saved anyway. 

The the events driven investor can take provide financing at a super-priority and help the company have a good start towards recovery. He can also buy the bonds at a great discount rate while shorting the company stock at the same time.

For the retail investor, events are fairly hard to come by. You have to wait patiently and take tactical bets when an opportunity arises. At least for me, having a lowly leveraged margin account gives me the option to take on such opportunities as they arise.

Lastly. one special event would have happened today :

UMS declared a a bonus share issue of 1 share per 4 shares owned. When a company does so, there is no ordinary business event or good news that warrants an increase in price. Therefore, mathematically you would expect UMS shares to drop about 20% this morning. That, in fact, did not occur. The stock dropped on 14% which meant that if you had bought the counter yesterday, you would have made 5% over the bonus issue,

This is a consistent pattern you will observe whenever a stock splits ? As of now I would not really bet on that happening all the time.

Anyway, it has been fun going through this book Efficiently Inefficient. This book has changed the way I look at my personal portfolio and in time to come will affect the seminars I give on investing. 

The current books I am reading are quite brisk reads, I should be reviewing entire books on investing moving forward.