Portfolio Manager Perspectives

Jeff Benjamin

Who knew you could make money investing in corporate events?

Binary strategy tied to company happenings more predictable than macroeconomic plays; bit of brilliance?

By Jeff Benjamin

Mar 29, 2012 @ 4:06 pm (Updated 4:11 pm) EST

As correlations increase across most asset classes, the idea of investing based on specific corporate events, such as a bankruptcy or merger deal, is certainly one way to add diversification within a portfolio.

“These kinds of binary events are more predictable because the probability doesn't depend on what the market is doing, and that's what makes it such a great diversifier,” said Thomas Kirchner, manager of the Quaker Event Arbitrage Fund Ticker:(QEAAX).

Mr. Krichner, who launched the multistrategy arbitrage fund in 2003, said the approach serves as a more predictable income-generator because the success of the underlying investments is not dependent on macroeconomic events or even corporate earnings.

“We don't look at it as a portfolio of debt and equity, because we're really investing in corporate events,” he said.

The fund, which has great flexibility to go short and own both stocks and bonds, is currently exposed to 84 separate corporate events.

In some cases, an event could be the announcement of a corporate merger between two public companies. In that scenario, Mr. Kirchner would buy shares of the target company while shorting shares of the acquiring company.

Proxy fights also represent opportunities for the portfolio.

For example, DSP Group Inc. Ticker:(DSPG), which develops technology for wireless phones, has been targeted by Starboard Value Fund LP, an activist hedge fund.

While DSP is profitable and generating lots of cash, Starboard has been buying shares of the company to try to force management to either distribute more of the cash to shareholders or be acquired.

“Starboard wants management to spend less money on research and development,” Mr. Kirchner said. “Right now the stock is trading at liquidation levels and we like it because we think it will most likely be acquired at some point over the next two or three years.”

The key to buying a stock in the midst of a proxy fight, he said, is getting in at the right time and then having plenty of patience.

“These things typically take two or three years and there's always a lot of excitement around the stock right after the proxy fight becomes public,” he said. “The best time to buy this kind of company is usually a few months after the fight is made public.”

DSP shares are up 24.6% from the start of the year, compared with a 12.4% gain by the S&P 500 Index over the same period.

Some of the other areas where Mr. Kirchner is finding opportunities include mortgage-backed securities and distressed debt of companies that have filed bankruptcy.

The fund, which has a three-star rating from Morningstar Inc., is up 5.5% from the start of the year, compared with a 4.7% average return for Morningstar's Long-Short Equity category.

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