Investment trust insider on the return of arbitrageurs – James Carthew: The unfit trusts at risk from an ‘arb’ attack
Investment company bargains abound following the discount widening that has plagued the sector. We have seen some welcome proactive moves by boards to address the problem.
What does not seem to have emerged yet is much aggressive action by discount players. This might be because in recent years it has been slim pickings for the arbitrageurs who used to target the sector. Might they make a comeback?
Those arbitrageurs looked to profit from discount closing. They would buy an influential stake in an investment company but would part-fund that by short-selling the underlying portfolio or some facsimile of that.
That reduced the amount of capital needed to mount a campaign against even quite large investment companies – which meant that just about anything was a target – and it magnified the potential return, so that quite decent returns could be achieved with even a relatively small narrowing of a discount.
Clearly, there is little merit in an arbitrageur targeting a closed-end fund that it cannot influence because voting control is in the hands of investors supportive of the status quo.
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