Rupal Bhansali

John Paulson: How Investors Can Benefit From Risk Arbitrage Done Correctly

We’ve just finished re-reading The Alpha Masters: Unlocking the Genius of the World’s Top Hedge Funds, written by Maneet Ahuja. There’s a great passage in the book in which legendary risk arbitrageur John Paulson explains how investors can benefit by doing risk arbitrage correctly. Here’s an excerpt from the book:

Q3 hedge fund letters, conference, scoops etc

Rupal Bhansali

Paulson: “Say you get a $50 offer from a company that was trading at $35 and it immediately jumps to $49,” he offers. “Now most investors don’t want to stick around for the last dollar and risk losing $14 if the deal breaks. They made a good profit and want to take the property and go home. On the other hand, the arbitrageur steps in, and for that extra dollar, takes the $14 risk of deal completion. Now a dollar may not sound like a lot. But a dollar over 50 is roughly a two percent return. And let’s say it’s a tender offer and will close in 60 days. That means you can do that deal six times a year so six times two is a 12 percent rate of return. That can be an attractive rate of return for a relatively short-term investment.”

But a 12 percent return isn’t outsized by any means, let alone by hedge fund standards of excess. There are other reasons to invest, namely the fact that risk arbitrage is not correlated with the market. “Let’s use that same example,” he says. “If you bought the stock at $49, and the market fell 10 percent over the next two months—you would still earn that 12 percent annualized return, just as long as the transaction closed.”

“The beauty of arbitrage is you can earn good returns that are non-correlated with the market. A deal like this could get exciting if another bidder came in and offered $60. That would be a 20 percent bump, or $10. That would boost the return from 12 percent annualized to 120 percent annualized. It doesn’t happen all the time but it happens often enough that we spend a lot of time trying to determine which of the announced deals could get a competitive bid to capture that potential excess return.”

For more articles like this, check out our recent articles here.

Article by The Acquirer’s Multiple

Saved Articles

The Life and Career of Charlie Munger

Charlie is more than just Warren Buffett’s friend and Berkshire Hathaway’s Vice Chairman – Buffett has actually credited him with redefining how he looks at investing. Now you can learn from Charlie firsthand via this incredible ebook and over a dozen other famous investor studies by signing up below:

  • Learn from the best and forever change your investing perspective
  • One incredible tidbit of knowledge after another in the page-turning masterpiece of a book
  • Discover the secrets to Charlie’s success and how to apply it to your investing
Never Miss A Story!
Subscribe to ValueWalk Newsletter. We respect your privacy.

Congrats! Are you a smart person?

We have an exclusive targeted & limited time offer for being a sophisticated and loyal reader.

ValueWalkPremium is a website and newsletter on the latest industry news much of which is not in the public domain and obtained via our sources.

We also have 10 years of resources on how to use this information to better your investment process.

Sign up for  today and get our exclusive content for 40% off. This is our second biggest discount ever!!

Use coupon code VIP20 or click on the button below

Limited time offer only ENDS 3/31/2020 or after the next 45 subscribers take advantage whichever comes first – please do not share this discount with others