BHP Billiton (BHP/BBL): Pairs Trade

Author: ajalper

BHP Billiton’s BHP shares are currently trading at a 20-22% premium to its BBL shares. BHP is a DLC (dual listed company). Both shares represent the same equity share and are entitled to the same dividends and are listed in Australia and the UK but are both resold on the NYSE as BHP and BBL. This spread is at previous historic extremes. The spread has been trending greater over the last 5 years from equal value, but has maintained an average premium of about 13% over the last two years. Given the high liquidity in both shares, and similar Bid/Ask spreads, the current premium in not justified and should return to a 13-15% premium in the next two months.

I am currently short BHP and long the equivalent value of BBL

Chipotle (CMG/CMG-B): Pairs Trade

Author: ajalper

Chipotle’s A shares are currently trading at a 20-24% premium to its B shares. This spread is near its previous historic extremes. The A shares have a high probability of returning to a 7-10% premium within the next two months if not sooner.

I am currently long CMG-B and long the equivalent underlying dollar value of CMG $100 May Puts.

Blockbuster (BBI / BBI.B): Pairs Trade

Author: ajalper

Blockbuster’s A shares are currently trading at 2.25-2.75x the value of the B shares. Blockbusters pre-September ratio tracked at roughly 1.1x. Since mid September the ratio has varied wildly from 1.25-2.75. The spread had closed significantly in the last two months. On Tuesday there was a bankruptcy rumor that sent the A shares from over $1.00 down to $.20 in a half hour before the trading was suspended. Both A and B shares experienced high volume during the sell off and the next day during the purchasing of shares. The scare and high volatility had unhinged the correlation between the A and B shares. The A shares are currently trading at about $.45 and the B shares $.17. It is likely that the spread will close significantly towards 1.5x in the next month, once volatility subsides. Because of high selling pressure, the available shorts for the A shares are limited. If you are willing to risk a forced buy-in if shares to borrow run out, this is a high probability pairs arbitrage play. (According to the IB Website, there are currently 700,000 shares available for shorts, 3/6/09). To take advantage of this spread, short A shares and buy long an equivalent dollar value of B shares.

I am short bbi and long bbi.b, and continuing to add to my position.

Berkshire Hathaway (BRK.A / BRK.B): Pairs Trade

Author: ajalper

The A shares are currently trading at a 6% (down from a peak 10%) premium to its historic relative value to the B shares. The premium usually bounces between 0-2%.  This is a highly unusual spread for this pair that tends to track very closely. Other smaller spreads in recent past have closed within a day or two. The unusual market conditions and the recent heavy sell off and long-term low of the B shares, may cause it to revert to the mean a bit more slowly, since a rally in the B-shares my be required to close the gap. This is not a large spread in relationship to other opportunities currently in the market, but has a very high probability of reverting to its historic relationship in the short-term. A shares represent 30 times the face value of B shares.  A relative arbitrage play of selling 1 A share short and 30 B shares long would return approximately $4500. Obviously, enough capital and margin is necessary to make the initial trade.

I am currently short on the A shares and long on the B shares.

Lennar (LEN.A / LEN.B): Pairs Trade

Author: Mr. B

Short LEN and go long LEN.B

I am arguing that the LEN.B shares are economically superior to the LEN’s mainly due to difference in voting rights. The LEN.B shares carry 10 votes for every 1 of the LEN’s. So the LEN’s should be trading at a discount to the LEN.B’s
Historically (last 5 years) LEN/LEN.B has averaged a 9% spread, but it should really be negative. As you can glean from the graph the spread has blown out recently.

I suspect one of the reasons for the spread being so wide is because the LEN’s can be tough to borrow from time to time, so it might be more difficult to arbitrage away the spread.

It is more likely due to liquidity though. Lennar Corp stock is significantly shorted (22% of float) and the LEN.B’s trade thinly compared to the LEN’s. So if you want to short Lennar you go for the LEN’s and with the recent short covering due to the breakdown in the ARB market the spreads blew out. I don’t think this trade is very different from the MWA and GEF trades.

5 year LEN/LEN.B spread. Red line is average (9%)

Mueller Water (MWA / MWA.B): Pairs Trade

Author: NHall

The MWA and MWA.B pair trade.  Gap has been as tight at $.08 and as wide as $.30 recently.  B shares worth economically more, but trade at a discount, and are being converted to A shares, approved at the next shareholder meeting.  Pick up a quarter/share on a riskless basis.

http://www.marketwatch.com/news/story/mueller-water-products-proposes-submission/story.aspx?guid=%7B001EA5DD%2D0348%2D4C1A%2D9339%2DF348E2B217BB%7D