Why Hedge Funds Are Pouring Billions Into Blank-Cheque Companies

Patrick Boyle examines the rise of SPAC arbitrage, a strategy hedge funds use to capture low-risk returns. This video explains how these investment vehicles function and why major firms are aggressively increasing their exposure to them.

SPAC arbitrage involves buying shares in a special purpose acquisition company at or below its net asset value. Investors aim to profit either by selling at a premium after a business combination is announced or by redeeming shares at the IPO price plus interest while retaining warrants. These warrants offer the potential for upside by allowing conversion into shares at favorable prices after a merger.

The strategy has attracted massive capital, with firms like Millennium Management significantly scaling their positions. As of December 2020, Millennium held $4.4bn in SPACs, a sharp increase from $750m in 2019. High-profile figures like Chamath Palihapitiya have also become central to the trend, launching multiple vehicles and participating in private investments in public equity, even as some deals face scrutiny from short-sellers.

Source: The Next Hedge Fund Scandal