WSJ Says New SPAC Like an MMF
The Wall Street Journal published an odd piece, "It's Official: SPACs Are the New Money-Market Funds." It explains, "As markets sour on speculative assets, a new exchange-traded fund is offering a twist on investing in special-purpose acquisition companies. Sometimes called 'blank-check' vehicles, SPACs last year became Wall Street's favorite way to list flashy ventures with no profits. Many financial firms have unveiled products to grant investors easy access to this market. In late 2020, Defiance ETFs was the first to set up a fund with allocations to both blank-check vehicles themselves and the merged companies that emerge from them. Its top holding is electric-car startup Lucid Group.... The new ETF, launched last week by hedge fund Morgan Creek Capital Management and financial-technology company Exos Financial, completely shifts the focus: Now SPACs are all about making small returns for almost no risk, like a bank deposit or a money-market fund." It explains, "In a goldilocks scenario, 'our experience tells us we can add a few basis points over Treasury yields,' said Mark Yusko, Morgan Creek's chief executive, of his new Active SPAC Arbitrage ETF, which tellingly is trading under the 'CSH' ticker. SPACs can indeed play this role if bought at the right time, which may be counterintuitive but has long been known among hedge funds. It stems from the minutiae of how the vehicles work: Investors are allowed to demand their money back before a merger is completed, or once SPAC sponsors run out of time to find a target—often after two years. Meanwhile, the cash is placed in a trust that earns interest from ultrasafe securities. What is more, whenever negative market sentiment pushes SPAC stocks below the value of their share of the trust, investors who buy in are guaranteed extra returns at maturity -- and without ever holding a single share in an air-taxi company. 'I hate to say it's boring, but it's boring,' Mr. Yusko added." The Journal adds, "Morgan Creek's ETF charges 1.25% in fees, whereas many money-market funds stay below 0.1%. And because an ETF is forced to add to its portfolio when it receives inflows, arbitrage gains will tend to become smaller if it becomes too popular. Also, the SPAC discounts that underpin the strategy could dry up if there is another surge in their popularity -- though the fund also holds warrants on the post-combination SPAC firms, which would revalue a lot in this scenario. Whether SPAC arbitrage proves to be a lasting alternative to money-market funds remains to be seen. That it perfectly captures the zeitgeist of the current market, however, seems hard to deny."
