Why Special Situations Funds?
Special situations funds often adopt strategies that might be uncorrelated with the market and can perform well during times of distress. Obviously during deep market downturns like we saw during the Great Recession of 2008-2009, all correlations tend to go to one but for investors looking for absolute returns, special situations funds can prove to be a valuable tool in a diversified portfolio. We track a list of curated special situations funds here.
Examples of Special Situations
There have been numerous special situations that have worked out well for investors over the last several decades. A few recent ones that come to mind include the merger arbitrage situations related to the acquisition of the gaming company Activision Blizzard by Microsoft and the acquisition of Twitter by Elon Musk. On the spinoff front, the spinoff of Ferrari from Fiat Chrysler (now called Stellantis), the spinoff of Chipotle from McDonald’s and the various spinoffs from GE under Larry Culp’s leadership are all examples of successful outcomes.
Some of our favorite special situations occur when multiple strategies like merger arbitrage, spinoffs and insider transactions all come together in the same company, as we saw with Pfizer’s acquisition of Biohaven in 2022. We also track spinoffs with insider buying in a custom screen we created called the Spinsider.
Risks & Rewards of Special Situations Investing
The examples of special situations provided above were all successful outcomes that generated handsome profits for investors who were willing to deeply understand a situation, assign probabilities to various outcomes and acted decisively. Sometimes the positive outcomes could also result from beginner’s luck arising from taking excessive risks without realizing the downside of the situation.
Special situations, while often uncorrelated with the market, are not without risk. In a merger arbitrage situation, the two key risks are the deal failing or taking so long to complete that the annualized returns generated were not worth the risk. With spinoffs, parent companies sometimes load the spinoffs with so much debt that a market downturn can push a struggling spinoff into bankruptcy. Each special situation is unique and both the risks and rewards need to be analyzed before making any investment decisions.
How to Identify Special Situations?
This in many ways is the easy part with InsideArbitrage. We prefer to collect most of our data directly from the source (SEC in many cases) and put together not only currently updated lists of special situations for each of the strategies we follow. We then update those special situations as they progress through their lifecycle.
We follow M&A activity from announcement to either completion or deal failure and document the various twists and turns along the way. InsideArbitrage brings together the perfect combination of data, tools and analysis to help investors interested in special situations make informed decisions without spending inordinate amounts of time finding and curating data.
FAQ
1. Do you track all types of special situations including liquidations and bankruptcies?
We current track merger arbitrage situations, spinoffs, stock buybacks, insider transactions, management changes, SPACs, tender offers and reverse splits. We don’t track liquidations and bankruptcies because of the long time periods those special situations take to play out and the need for specialized legal talent to assess those opportunities.
2. Do you personally use these strategies?
InsideArbitrage was created because our founder started focusing on special situations more than fifteen years ago and he created some of our early tools like the merger arbitrage tool for his personal investing. Most of his investments are still focused on special situations and he recognizes that different market conditions favor different strategies. Having a toolbox of more than half a dozen strategies creates an unparalleled idea generation engine.
3. Do you currently focus on the U.S. or international markets as well?
We are currently focused on U.S. listed stocks and feel that there is a whole lot more we can do with special situations on that front before we expand internationally.
4. Do you just provide special situations data and tools or also share ideas?
Many of our institutional subscribers, which include some of the largest special situations funds, prefer to do their own research and use our service for the data and tools we provide. For investors that would like a little more information about specific situations, we also include two spotlight ideas in our monthly special situations newsletter.
Every Sunday, we look back at all the insider transactions from the prior week and usually cover one purchase or sale that jumped out to us in a series of articles called Insider Weekends. Our Merger Arbitrage Mondays series that we have been publishing continuously for over 15 years is also quite popular with our subscribers.
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Special Situations Funds