Trends Watch: Special Situations Investing
- Oct 27, 2022
EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.
This week, Elana talks with Isaac Tak, Portfolio Manager, BCK Capital Management.
What is your outlook for event-driven investing?
Our outlook for the type of special situations investing we do, which is an opportunistic, alpha-focused approach across both merger-linked and non-merger special situations, is quite positive. However, I would have to have some degree of reservation in making that statement for the simple fact that there are several headwinds today that come with meaningful tail risks.
On the one hand, many of the types of catalysts we are seeking to profit from are largely independent of the broader stock market. In mergers, for example, whether it’s a deal in the process of closing or in some sort of litigation, the outcome will not depend on whether the equity indices are 10-15% lower from here, or 10-15% higher from here.
On the other hand, timing is everything, and with the level of uncertainty in the markets, while the outcome of these investments may be uncorrelated, the entry levels are correlated to the risk-seeking versus risk-avoidance sentiment, and that can certainly affect our overall gains. It’s just as well likely things could get a lot worse from today as they can get better, which is where our degrees of reservation come from. Overall, I think the fact that we pursue alpha-dependent strategies, and more broadly that many of my peers in event-driven investing may also pursue alpha-dependent strategies to varying degrees, makes the outlook for event-driven investing particularly compelling when there’s a lot of uncertainty of whether market beta will continue an upward trend.
What are the greatest opportunities you see and why?
The greatest opportunities right now are in select mergers trading with very low implied probabilities of completion. There are many mispriced opportunities across situations that don’t depend on the market environment to work out. We saw this as recently as August when a consumer tech company in the U.S. received its final approval to move forward on the acquisition of a London-based operator. As the competition bureau review process became somewhat convoluted with an odd initial finding of how “competition” would be defined, the overall negative market sentiment allowed us to accumulate stock at very low implied probabilities, and thereby outsized returns on the position.
What are the greatest challenges you face and why?
The greatest challenges are some of our open-ended special situations. While we run these positions on a hedged basis so that we limit our market exposures, the repricing of stocks to “fair value” always requires an active market seeking to pursue good investment opportunities. If everyone is running scared, stocks have a hard time getting to fair values.
What keeps you up at night?
The really big systematic tail risks. We all know they’re there because of all the geopolitical tensions happening right now and can escalate well beyond our expectations. For us, we try to manage these risks by keeping our gross a little lower than our historic averages, and by positioning our hedges in a way that give us the ability to take advantage of any opportunities that the tail risks might create.
The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.
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Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.
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