In 2021, listing via special purpose acquisition companies, or SPACs, exploded in popularity. Of 942 total listings last year, 599 were via SPACs. Klymochko’s firm offers hedge fund and private equity strategies of an institutional calibre in the form of low-cost ETFs. Investing in SPACs is one of their key themes, and arbitrage seems to be reasonably safe, said Klymochko.
However, “it's a strategy that's simple, not easy”, Klymochko warns. Doing it successfully requires intensive time investment, perhaps even more than a full-time job. The advice is to only attempt it if “you have the time to dedicate basically your whole life to it,” Klymochko added.
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Given the complexity of filings and disclosures that can run into thousands of pages, investing in SPAC arbitrage, “should be the realm of professional investors, because it can be very difficult to analyse, and takes basically a full time team to be able to operate properly.”
Despite the logistical demands, the returns from SPAC arbitrage are relatively low. “It's not a strategy that will shoot the lights out – you're not going to double your money doing this. I mean, we're looking to hit singles, that means high single digit annualised return. If we can generate 7%-8%, annualised in a low-risk manner with this strategy, we're very happy.”
“It's not a strategy that will shoot the lights out – you're not going to double your money doing this. I mean, we're looking to hit singles, that means high single digit annualised return. If we can generate 7%-8%, annualised in a low-risk manner with this strategy, we're very happy” - Julian Klymochko
Accelerate Financial follows two key principles when investing. The first is to buy at or below the net asset value, in case the SPAC’s eventual acquisition is too richly priced. The second is to sell before the closing window that allows investors to exit at no lower than the net asset value. Once this window shuts, Klymochko explains, the SPAC becomes like any other equity share and, since many of these investments are very early stag,e the shares can fall sharply.
The SPAC trend tends to cycle through micro themes such as space, battery technology and electric vehicle charging, which all formed short hype cycles within 2021. Klymochko said that more deals in the non-fungible token (NFT) space were probable, given the current buzz around them.
“My approach to the stock market is to be highly diversified,” said Klymochko. “Just be diversified with as many asset classes as you can. Equities, real estate, crypto, stocks, bonds, cash, you know, there’s a tonne of options for investors these days, so why not use them?”
In addition to portfolio diversification, Klymochko advises investors to also diversify the potential exit or maturity periods, “because you never know when you'll need liquidity.” This is an often-overlooked aspect in many retail investors’ portfolios and can force inopportune exits.
In Klymochko’s portfolio, while there are arbitrage stocks that have short exits, there are also equities meant to be held for long periods.
“I do have a bunch of stocks that I've held very long term, Berkshire Hathaway, Constellation Software,” he explains, because of his confidence in management and governance.
“I do have a bunch of stocks that I've held very long term, Berkshire Hathaway, Constellation Software” - Julian Klymochko
To hear more insights from Klymochko, listen to the full episode on Opto Sessions.
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