September 23, 2020 – The SPAC index bounced back over the past month, gaining 8.0% even as the S&P 500 declined -3.4%.
They say that “diversification is the only free lunch in investing” and the goal of true diversification is to include within a portfolio a number of return streams that exhibit low correlation to traditional asset classes such as stocks and bonds. In the recent piece, Vaccinate Your Investment Portfolio With Arbitrage, I wrote, “In addition to far superior risk-adjusted performance over the pandemic, the other key aspect of an allocation to SPACs is the correlation (or lack thereof). Year-to-date, SPACs have had a -0.37 correlation with bonds and a -0.58 correlation with stocks. That, ladies and gentlemen, is what we like to see for a diversified portfolio.”
SPAC arbitrage has been a great place to be in 2020, as it has been able to attain attractive returns with low volatility and little (actually negative) correlation to stocks and bonds. In addition, during the steep stock market decline in the first quarter in which the S&P 500 declined -35% and the TSX dropped -38%, the SPAC index held up, declining just -6.6% peak-to-trough. These attractive characteristics are why the Accelerate Arbitrage Fund (TSX: ARB) now has a nearly 60% allocation to SPACs across 65 blank check companies.
The frenzy in blank issuance continues unabated, as $7 billion was raised across 25 IPOs thus far in September. This dramatic pace in new issuance has increased the total SPAC market capitalization above $70 billion for the first time, up from less than $25 billion in April.
We expect this trend to continue in the near term, given the substantial amount of S-1 filings for blank checks. In fact, on September 18th, Social Capital Hedosophia filed IPO paperwork for three upcoming SPACs to raise a total of nearly $2 billion. The group has already issued two blank check IPOs this year, raising over $1 billion.
Over the past month, 11 SPACs have announced business combinations with private companies. Investors cheered these blank check deal announcements, as these 11 SPAC units currently trade at an average premium to their net asset value of 34.7%, with a range of 4.6% to 123.4%. SPAC arbitrage, buying at or below NAV and then exiting upon a deal being struck, is thriving in the current environment.
The Accelerate AlphaRank SPAC Monitor details various metrics on the current opportunity set while offering details on every individual SPAC currently outstanding. The Accelerate AlphaRank SPAC Effective Yield tracks the average arbitrage yield offered in the market. The Accelerate AlphaRank SPAC Index tracks the price return of the SPAC universe.
* AlphaRank is exclusively produced by Accelerate Financial Technologies Inc. (“Accelerate”). The Accelerate Arbitrage Fund may hold a number of securities discussed in this research. Visit AccelerateShares.com for more information.