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Individual Investor
Workouts
This unique model invests in workouts. Workouts are special situations in which a corporate event sets the future value of a security. Such events include mergers, tender offers, going private transactions and liquidations. This model will take advantage of these arbitrage opportunities without using margin or short positions.
This model takes a disciplined value investing approach to identifying and investing in low risk opportunities in workouts, i.e. fat pitches. Special situations are examined through the lens of a value investor.
Workout opportunities are often difficult to find and track. The model uses securities filings and financial media reports daily for corporate events that may lead to investment opportunities. Those special situations are then examined for risk factors and potential investment value.
This model will typically hold between 5 and 15 positions depending on the number of workouts currently available. To some degree positions will be weighted by their risk adjusted probable return.
Most positions will be closed when a workout is completed and cash is paid out to shareholders. On occasion, a position will be sold before the completion of the workout if the market price approaches the workout value and a better opportunity exists. Positions will also be sold if the corporate event generating the special situation is canceled or drastically modified.
Depending on market conditions this model also may invest in deeply discounted stocks that are trading below their estimated liquidation value on the assumption that either the stock’s price will recover or a corporate action will be taken, such as a liquidation to return value to shareholders. The model may also occasionally exploit value opportunities that result from stock price declines following the canceling of a merger deal or other such event.
Model commentary
It's a challenging environment for Workout opportunities
17 January 2012
The spread on risk arbitrage opportunities seemed to shrink over 2011, and tender offer opportunities became scarce.
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