Accelerate Arbitrage Fund

About the Fund

The Accelerate Arbitrage Fund (TSX: ARB) provides exposure to a merger arbitrage investment strategy. The Fund aims to generate consistent, low-volatility returns by investing in listed equity, debt or derivative securities of target companies involved in mergers or corporate actions, while selling short certain listed equity, debt or derivative securities of acquiror companies involved in mergers or corporate actions, where applicable.

What is Merger Arbitrage

Merger Arbitrage is an investment strategy that capitalizes on the spread between a company’s current share price and the consideration paid for its acquisition in light of an announced merger transaction. The merger risk premium— or the spread between the acquisition price and the trading price of a stock—compensates the arbitrageur for the risk of the acquisition failing to close. The merger arbitrageur’s goal is to “lock in” the spread earned upon deal closing and profits from buying a takeover stock at a discount to its acquisition price.

Investment Objectives:

  • Outperform the S&P Merger Arbitrage Index
  • Generate consistent, low-volatility returns
  • Provide an attractive distribution yield
QUICK FACTS

Type:
Event-driven

Date Started:
n/a

Management Fee:
0.95%

Performance Fee:
None

Investment Manager:
Accelerate Financial Technologies Inc.

Distribution:
3% Annual Yield Distributed Quarterly

Exchange:
TSX

Currency:
CAD

Risk Rating:
Low

Historical Track Record

Investment Process

Deal Evaluation & Selection 

Accelerate uses digital media, proprietary data screens, and sell-side analyst reports to source outstanding merger opportunities. The deals are then placed into the merger database where the team
conducts a review of the data through; press releases, merger agreements, and proxy statements. A proprietary “AlphaRank” risk rating is then assigned to each merger transaction. Furthermore, Accelerate calculates 2 key factors in the selection process; the merger yield and the implied odds of success to determine the securities’ risk rating. If the merger yield is attractive, and exceeds the investor’s cost of capital, the team will move forward with the next step in the investment process.

Risk Management

Five key factors are considered to ensure that risks are appropriately managed:

• Does the buyer lack credibility?
• Does the financing source lack credibility?
• Is the deal non-definitive?
• What is the extent of the regulatory risk?
• Is there a buy-side vote?

Buy-side votes allow shareholders to vote against the original proposed deal in order to get a premium from a hostile interloper offering more, causing losses for an arbitrageur.

Position Sizing & Portfolio Management

This process aims to limit the risk of loss on a deal break to a -2% NAV decline. “AlphaRank” risk ratings are also considered when allocating position sizes. Riskier deals will represent smaller allocations in the portfolio.

Execution

Merger arbitrage is typically conducted on a company’s common shares. However, there may be other opportunities to earn a merger spread, including through a company’s preferred shares or bonds, or through derivative securities such as options or warrants. If one is trading the common shares of a target in an all-cash deal, then the trade is fairly simple: the trader places their bid for the target at the desired price and waits to get hit. If the deal includes stock consideration, the trader first has to ensure the short borrow is secured in order to short the acquiror’s stock. Once short borrow has been secured, the trader can set up the spread. To implement this type of trade, one should use a pair trader. Pair traders work by trading both legs of a merger arbitrage spread, being the target and acquiror, at the same time. The trader sets the desired merger spread into the pair trading system, based on the merger consideration, and gets filled on both legs long and short.

Deal Monitoring

After successful deal analysis, risk mitigating, position sizing, and execution, the arbitrageur goes into monitor-mode. In the case of tender offers or takeover bids, shareholders must tender shares to receive the consideration amount, whereas in mergers, a vote must be cast and the type of consideration (cash or shares) elected. Shareholder votes and regulatory approvals need to be settled prior to the deal completion.

Performance as of 2020-Feb-28

Ticker1 Month3 MonthsYTD1 Year3 YearSince Inception
ARBn/an/an/an/an/an/a
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