We are committed to providing solutions that strive to reduce overall portfolio risk while generating absolute returns, regardless of the market environment. To achieve these goals, we pursue the following investment principles:
Create portfolios of high-conviction ideas from markets around the globe
- We believe that our worldwide focus enhances our ability to identify and profit from event-driven opportunities.
Invest in highly liquid situations
- We select investments in companies with sufficient daily trading volume to support efficient movement into and out of positions.
- We favor larger, more liquid deals, as we have found that they are often more inefficiently priced than smaller, less liquid deals.
Focus on absolute returns
- We seek to hedge directional (market) exposure at both the individual deal level and portfolio level. The success of our investment is predicated on the successful completion of the corporate event.
- We concentrate on minimizing volatility and transaction risk.
Avoid speculative situations and never invest on rumor
- We require that every investment thesis be fact-based and have a defined timeline and expected rate of return.
Our investment process is focused on identifying corporate restructurings that present attractive arbitrage (price discrepancies) opportunities with a high likelihood of being completed. This rigorous, highly disciplined process enables us to carefully screen potential investments across multiple categories and criteria with a meticulous emphasis on risk management. Over more than 30 years, we have had a greater than 98% success rate at selecting deals that have been completed.
Global, publicly announced transactions
Capitalization - Global publicly announced corporate events; typical market capitalization > $350 mm.
Liquidity - Securities with sufficient daily trading volume to support efficient movement into and out of positions.
Regulatory Environment - Only countries with predictable regulatory bodies and legal systems where we have insight.
Identify high probability event-driven situations globally
Strategic Review - Analyze public information regarding the companies in the transaction and the markets in which they compete.
Regulatory Review - Estimate the probabilities of a government antitrust investigation and other regulatory actions and their likely outcomes; monitor litigation by government and private parties.
Scenario and Probability Analysis - Mitigate various potential deal risks such as transaction termination, deal delay, material adverse changes to either party, shareholder disapproval, tax obligations, and financing concerns. In hostile transactions, analyze target company anti-takeover defenses.
Execution Risk Assessment - Analyze the impact of geographical execution cost, local fees, and currency hedging costs on each trade to evaluate the impact on the specific arbitrage spread, or pricing discrepancies.
Proprietary risk management
- Quantify risk/reward profile
- Evaluate diversification benefit to the portfolio
- Quantify effect on portfolio volatility
- Review position and portfolio liquidity
- Conduct stress test and scenario analysis
- Size positions and monitor VAR (Value-at-risk)
Embedded Risk Analytics Include:
- Position size as a percent of AUM
- Forecasted probability of success for each transaction
- Individual risk/reward profile for each transaction
- Potential downside and related VAR calculation (<2%)
Portfolio Construction & Hedging
Position sizing, hedging, and volatility/beta minimization
Allocate Capital - Allocate capital based on expected risk-adjusted returns and portfolio volatility:
- Identify position level hedges
- Determine macro hedge overlay
- Opportunistically execute trades to minimize market impact
- Typically 75 active situations
Dynamic monitoring of the risk/reward profile of each investment
Actively monitor the progress of each deal; adjust our hedges and position sizes as needed to maximize the risk/reward profile:
- Research new and ongoing risks
- Constantly review all assumptions
- Top-down de-risking employed at the portfolio managers’ discretion in periods of market distress
Minimize market exposure and maximize compensated risk
We strive to expose our clients only to the risk of delay or termination, rather than directional exposure to interest rate or stock market movements.
1. Deal Hedge:
- Stock-for-Stock Transaction: fully sell short the appropriate number of acquiring company shares that are to be received as consideration for the transaction.
- Cash Transaction: given that the dollar value to be received is fixed, we will purchase shares of the target company only.
- Residual Market or Beta Exposure: we may hedge through the use of macro sector hedges, typically via put option structures.
2. Currency Hedge:
- In foreign transactions in which the cash consideration is not paid in U.S. dollars, currency exposure is hedged by making forward sales of the currency to be received. The forward sale is timed to settle on the expected date of deal completion.
3. Macro Hedge:
- During extreme market conditions, there may be an increased correlation among theoretically uncorrelated assets. In such situations, the portfolio may hold a market hedge, often referred to as a “macro hedge,” which is typically structured using index put options or option spreads.
Proactive reduction or selling of positions when circumstances warrant
To minimize potential losses in individual investments, our risk management policies lead us to be extremely proactive in reducing their size or selling them all together when circumstances warrant:
- Arbitrage spread narrows
- Thesis changes