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The special-purpose acquisition company market has become an accidental victim of the Archegos Capital Management scandal because the bank controlled loans to hedge funds that invested heavily in blank check companies.
Wall Street banks have become more cautious about how much leverage they can provide to customers. Collapse According to several market participants, the investment of Archegos, an investment company run by Bill Hwang, forced hedge funds and family offices to reconsider their investment in Spacs.
“Because of Archegos, the terms of the main brokers are generally tightened,” said a senior banker engaged in Spac transactions. “A lot of the return status of hedge funds comes from the leverage they use. When it is leveraged, it is a gravy train.”
Lack of leverage is frustrating the investment strategies of hedge funds, which have played an important role in promoting the prosperity of Spac, usually investing in the early stages — and then not sticking to it for the long term.
These investors received a distribution before Spacs’ shares went public at a price of $10 per share, and the cash raised by the company was put into a trust to buy U.S. Treasury bonds.
By using borrowed funds, these funds will eventually get higher returns from underlying assets that many people consider risk-free.
Many hedge funds subsequently sell when the stock price “explodes,” or redeem their investments when shareholders vote on the eventual merger with the operating company.
Facts have proved that this type of investment is particularly advantageous when retail traders push up Spacs’ stocks at the request of the promoters Star statusHowever, as leverage becomes increasingly restricted and interest in blank check companies diminishes, the returns that hedge funds have received until recently will be difficult to replicate.
After a sensational year in 2020 and a hot start in 2021, the restriction on leverage is another headwind for the Spac market. Performance deteriorated In recent months, due to the decline of technology stocks and regulatory and accounting issues.
Matthew Simpson, managing partner of Wealthspring Capital, which invests in Spacs, said: “We see this in the price movements of securities trading below par, because banks are not as free to provide leverage as they do, and prices are now higher.”
According to an analysis of Refinitv data by the Financial Times, more than 80% of Spacs, which are still looking for acquisition targets, are now trading at less than $10, which is the pricing level of the blank check company’s stock during the initial public offering.
“All rocket fuel comes from these things. If hedge funds are allowed to increase leverage, they will increase leverage to buy all Spacs that trade below $10,” said Matthew Tuttle, CEO of Tuttle Capital Management. ) Said that the company manages an exchange-traded fund focused on Spac.
It is difficult to give an accurate figure to show how much leverage Spacs hedge funds have in the past, or the extent of the recent pullback, but industry insiders said that before Archegos went bankrupt, they had seen the company use up to 9 times leverage. up.
“Major brokers have gained crazy leverage from post-Archegos,” said a Spac investor.
A hedge fund manager has discussed the use of leverage in their Spac investments with several major prime brokers, and he said they have been repeatedly told that they have reached their limit.
However, some market experts said that the impact of Archegos was a factor in the cooling of the Spacs market, and the appetite for blank check companies generally declined. According to data from Refinitiv, the number of releases has slowed down. There were only 13 Spacs listed in the US last month, compared with 110 in March.
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