This one came up on my radar a few days ago too, these dual class pair trades don’t have much in them, however I agree its much higher probability trade.
Cogitator
My take on pair trades is that: (1) Spreads close quickly when management announces a merge of share classes (which is very rare), (2) spreads close when more money flows into arbitrage funds, (3) risks of arbitrage go up as it becomes more popular.
I don’t think you can make meaningful returns doing share class pair trades on the whole… unless this type of “arbitrage” becomes more popular.
Please correct me if you have different data about share class arbs. And thanks a lot for posting. This forum has been dead for months. I promise to attract more interest in it.
vigorishuser10
I would rephrase your third point. It is harder to find good opportunities in share class arbitrage as it becomes more popular.
Shares that are heavily arbitraged don’t spread enough to warrant interest. I manage roughly a $1 million portfolio, and I am able to generate a fairly consistent 40% annual pretax return from share class arbitrage positions. Realized gains are relatively consistent, quarter to quarter, and do not depend on corporate actions or arbitrage fund flows. I started with a portfolio of one tenth the size and thought that I would have a hard time finding sufficient opportunities as I scaled up. This was not the case. I don’t know how returns would be affected at even larger scales.
In what proportion do you sell short and go long? Do you arbitrage equivalent share amounts or dollar amounts? I tend to do equivalent dollar amounts.
Also, how much leverage do you use? Do you short an amount equal to 100% of your capital and go long 100% of your capital?
vigorishuser10
I am trading contracts that are a ratio of long and short shares that give me a close approximation to equal dollar amounts.
I am trading in a margin account that I can leverage up to 333% of each side of the trade. So if I am buying $100 of shares X and shorting $100 of shares Y, I would need $60 to cover my initial margin obligations.
I try to leave at least 20%-30% uncommitted cash in the portfolio as a hedge against bad calls, and I am trading 10 to 20 pairs at one time so that no one pair makes up a large portion of the holdings. This smoothes out the ride a little.
This one came up on my radar a few days ago too, these dual class pair trades don’t have much in them, however I agree its much higher probability trade.
My take on pair trades is that: (1) Spreads close quickly when management announces a merge of share classes (which is very rare), (2) spreads close when more money flows into arbitrage funds, (3) risks of arbitrage go up as it becomes more popular.
I don’t think you can make meaningful returns doing share class pair trades on the whole… unless this type of “arbitrage” becomes more popular.
Please correct me if you have different data about share class arbs. And thanks a lot for posting. This forum has been dead for months. I promise to attract more interest in it.
I would rephrase your third point. It is harder to find good opportunities in share class arbitrage as it becomes more popular.
Shares that are heavily arbitraged don’t spread enough to warrant interest. I manage roughly a $1 million portfolio, and I am able to generate a fairly consistent 40% annual pretax return from share class arbitrage positions. Realized gains are relatively consistent, quarter to quarter, and do not depend on corporate actions or arbitrage fund flows. I started with a portfolio of one tenth the size and thought that I would have a hard time finding sufficient opportunities as I scaled up. This was not the case. I don’t know how returns would be affected at even larger scales.
In what proportion do you sell short and go long? Do you arbitrage equivalent share amounts or dollar amounts? I tend to do equivalent dollar amounts.
Also, how much leverage do you use? Do you short an amount equal to 100% of your capital and go long 100% of your capital?
I am trading contracts that are a ratio of long and short shares that give me a close approximation to equal dollar amounts.
I am trading in a margin account that I can leverage up to 333% of each side of the trade. So if I am buying $100 of shares X and shorting $100 of shares Y, I would need $60 to cover my initial margin obligations.
I try to leave at least 20%-30% uncommitted cash in the portfolio as a hedge against bad calls, and I am trading 10 to 20 pairs at one time so that no one pair makes up a large portion of the holdings. This smoothes out the ride a little.