Magnum is set to sponsor a market neutral arbitrage fund, the Ascendant Offshore fund run by David J...
Magnum is set to sponsor a market neutral arbitrage fund, the Ascendant Offshore fund run by David Jarvis and Rick Kung.
The fund focuses on arbitrage opportunities in Canada and the US. Its strategy is primarily based on merger arbitrage. This involves taking advantage of pricing inefficiencies that occur when two companies announce a merger deal. Anticipating the convergence of stock prices as the deal nears completion, the process typically involves shorting the stock of the acquiring company and buying the stock of the target company.
Jarvis said: 'Every arbitrage transaction is systematically analysed. This involves fundamental research of our own into the companies involved and what is motivating the transaction. We marry our insights with research from other houses in Canada by analysts who have long studied the companies involved. Generally, in the merger arbitrage space you're competing against the market, not each other, so we often have the ability to compare research with that of other arbitrage funds and traders.
'We also do an operational risk analysis that looks at the capital implications, the exposure if it's a cross-border transaction, the tax risks, and borrow/reorganisation risk. Using our own risk management models we then calculate deal-break value at risk that is, where we expect these positions to trade if the deal breaks and what our maximum loss would be. The size of any position will be determined by our risk assessment rather than how big a position we can get.'
The fund also uses other types of arbitrage to diversify its strategies, including long volatility arbitrage, which can involve buying a call option on a stock and shorting the underlying stock to hedge out exposure. Another is cash and carry arbitrage. This could be buying Canadian special warrants and hedging exposure in the underlying cash market.Investment Week 4 June 2001
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