The fund seeks to generate stable absolute returns that are consistently superior to conventional fixed income instruments by identification and quick execution of low risk moderate gain event arbitrage opportunities arising in the equity markets from time to time. Additionally, nominal and high yield debt would be considered to ensure optimum utilisation of funds and enhance returns with uncompromising emphasis on capital preservation.
The core investment strategy is to exploit corporate event arbitrage opportunities in the listed capital markets that inherently have limited correlation to economic cycles and market volatility. These opportunities are driven by corporate events like mergers, acquisitions, delisting and buyback of shares through a tender offer. The risk- return pay-off in most of such deals is deal-specific and hence has limited correlation to market cycles.
Typically, the price at which the buyer makes an offer for purchase is higher than the prevailing market price so as to induce shareholders to offer their shares. Arbitrage opportunities emerge in such cases due to the perceived discount in the pre-event market price in relation to the open offer and the post-event price, occurring largely due to asymmetric information distribution, difference in investment objectives and expectation amongst investors.
Nominal and High Yield Debt: It is quite possible that there may not sufficient Event Arbitrage opportunities at a given point of time. Hence, we do invest in debt / fixed income papers either short term or with high liquidity instead of parking money in low yielding liquid mutual funds. The focus is on opportunities in the AA to Investment Grade segment to optimize after tax yields while balancing risks.
Investments are balanced among the opportunities that are selected. Typically, exposure to any event will usually be not less than 2.5% and not more than 25% of a portfolio. Also, exposure to an event is restricted to 10% of its potential opportunity/offer size. Investment allocation towards selected opportunities is gradually increased over a period of time in line with our improved understanding of the event and also to mitigate the impact cost of build-up. Sufficient liquidity in the underlying stock, credible management and the risk-reward balance are key requirements for any opportunity. Event specific hedging are also selectively considered to lock-in gains / generate higher returns.