What Do You Buy After Rule Book Is Torn Up? Here Are Some Ideas

What Do You Buy After Rule Book Is Torn Up? Here Are Some Ideas

(Bloomberg) — Shares slumped. Credit plunged. And even gold, the Japanese yen and Bitcoin took a hit. In the burning carnage of global markets, there’s hardly anywhere to hide.

For a few traders, the old Warren Buffett adage of being greedy when others are fearful still applies. Historic dislocations spurred by a mad dash to safety during the coronavirus pandemic represent, in this view, lucrative opportunities for those betting on an eventual return to normality as policy makers unleash unprecedented stimulus to keep the global economy afloat.

Here are some trades that are finding favor with money managers amid the current rout:

Merger Arbitrage

Investors who bet on the success and failure of mergers and acquisitions have been hit hard by roiled markets, and the sell off has led to a sharp expansion in spreads between the shares of companies engaged in deals.

The spreads widen during periods of volatility like the current pandemic because of concerns that buyers will walk away. Kite Lake Capital Management is allocating additional capital to the strategy, betting that most deals will still complete, albeit some will face delays.

“It is our belief as well as our various legal counsels, that recent events do not constitute grounds for calling a material adverse change,” the firm wrote in a client letter. “It is also worth noting that no MAC clause was successfully invoked during the financial crisis of 2008.”

Aslan House Capital, a hedge fund firm started by former Oceanwood Capital executive Luke Lynch, argues that there remains “a substantial opportunity to profit for those who can accurately assess which deals will have a smooth pathway to completion, and which ones carry more uncertainty.”

For example, PSA Group’s takeover of Fiat Chrysler Automobiles NV (CHECK) has seen its spread widen, meaning shareholders in the Italian firm will receive a 40% premium compared to 10% previously if the deal completes as agreed. Lynch’s event-driven firm was up 4% this year through Friday.

Tech Stocks

Stephen Yiu, chief investment officer at Blue Whale Capital in London, has been buying shares in Microsoft Corp., Amazon.com Inc. and Adobe Inc. as he pares back cash levels to 5% from 10% earlier this year.

“The majority of the names in the funds are not going to be severely impacted,” Yiu, who oversees 248 million pounds ($288.7 million), said last week. Instead, the crisis will drive a big proportion of the population to online retailers, benefiting companies like PayPal Holdings Inc., so he has added to his holdings there.

Yiu has sold out of LVMH, the world’s largest luxury goods company, because of elevated short-term security, though he says the long-term story remains intact.

Value Bets

Some traders argue that the current sell off is creating a fertile hunting ground for cheaply-valued stocks. Hedge fund titan Seth Klarman’s Baupost Group has opened to new commitments for the first time since 2011 and spent about $1.5 billion scooping up assets in recent weeks. The fund fell as much as 8% in the first two weeks of March, and as much as 10% year to date.

Fixed-term Savings

What about personal funds? The rush to exit riskier investments such as shares and bonds has already led one smaller U.K. lender to withdraw fixed-term savings products as people move their holdings into cash.

Secure Trust Bank pulled its savings offers last week after a stream of customers poured money into the accounts. “We saw a hundreds of percent increase in demand for long-term savings like our five-year deposit,” Chief Executive Officer Paul Lynam said.

Liquidity Squeeze

A note of caution, however. The liquidity squeeze from the dislocation in credit markets means it can be tough to get in and out of positions in some strategies, making it more difficult to take advantage of the current upheaval.

“This is not a market, it is just an illiquid cemetery,” Danilo Onorio, founder of hedge fund Dogma Capital Asset Management, said. In energy credit markets, “even if you are small like me, you cannot do much when there is zero liquidity.”

©2020 Bloomberg L.P.

 

Bloomberg.com

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