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 correlated 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.
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 Must. On the spinoff front, the spinoffs 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 where all successful outcomes that generated handsome profits for investors who were willing to deeply understand a situation, assign probabilities to various outcomes and acted accordingly. Sometimes the positive outcomes could also result from beginner’s luck arising from taking excessive risks without realizing the downside of the situation not working out.
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 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 but also 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.
Upcoming Spinoffs
Merger Arbitrage
C-Suite: Appointments
Stock Buybacks
Insider Buying
Special Situations Funds