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 to profit 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

Structure:
Alternative ETF

Date Started:
April 7, 2020

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 regulatory filings, media, proprietary data screens, and sell-side analyst reports to source merger arbitrage investment opportunities. Once sourced, a deal is then placed into the merger database where the team conducts a review of the data through; press releases, merger agreements, proxy statements, and additional due diligence materials. 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 potential 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 may 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-Apr-30

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

Under current regulations, fund performance can only be published one year after its inception.

Fund Exposure
Deal Type Exposure

Fund Holdings as of 2020-Apr-30

Long Security NameWeight
Northview Apartment REIT5.1%
Allergan PLC5.0%
Tech Data Corp4.7%
KEMET Corp4.7%
LogMeIn Inc4.6%
Cincinnati Bell Inc4.5%
WABCO Holdings Inc4.5%
Advanced Disposal Services Inc4.3%
Legg Mason Inc4.0%
QIAGEN3.9%
Adesto Technologies Corp3.8%
Tiffany & Co3.7%
Acacia Communications Inc3.6%
Taubman Centers Inc3.5%
Gilat Satellite Networks Ltd3.4%
Meet Group Inc3.3%
ForeScout Technologies Inc3.2%
Anixter International Inc3.2%
TD Ameritrade Holding Corp3.2%
Front Yard Residential Corp3.1%
TerraForm Power Inc3.1%
GAIN Capital Holdings Inc2.8%
Carolina Financial Corporation2.6%
SB One Bancorp2.5%
Guyana Goldfields Inc2.4%
Experience Investment Corp2.2%
Craft Brew Alliance Inc2.0%
Wright Medical Group NV2.0%
El Paso Electric Co1.8%
DFP Healthcare Acquisitions Co1.6%
Amplitude Healthcare Acquisition Corp1.6%
Cineplex Inc1.6%
Fitbit Inc1.3%
Delphi Technologies PLC1.3%
FGL Holdings1.3%
Caesars Entertainment Corp1.3%
Yunhong International1.1%
East Stone Acquisition Corp1.1%
Central European Media Enterprises1.0%
dMY Technology Group Inc1.0%
SCVX Corp0.7%
South Mountain Merger Corp0.5%
CIIG Merger Corp0.5%
InterPrivate Acquisition Corp0.3%
Osprey Technology Acquisition0.3%
MSB Financial Corp0.1%
CHP Merger Corp0.1%
Short Security NameWeight
Charles Schwab Corp-3.3%
Brookfield Renewable Partners-3.1%
United Bancshares Inc-2.6%
Provident Financial Services Inc-2.6%
Silvercorp Metals Inc-2.4%
AbbVie Inc-1.9%
BorgWarner Inc-1.7%
Comtech Telecommunications Corp-0.6%
Fidelity National Financial Inc.-0.4%
Eldorado Resorts Inc-0.3%
Kearny Financial Corp-0.1%
EXPLORE OTHER INVESTMENT SOLUTIONS