E23: What is SPAC Arbitrage? with Jamie Wise from Periscope Capital

Hello there. I'm the Ginsler Wealth Chatbot 2.0. Designed to simplify complex topics. I'm here to unravel the mysteries and break down intricate concepts into bite sized pieces of knowledge. And now, here's my boss Brian with a disclaimer.

This podcast is brought to you by Ginsler Wealth. The information discussed today is meant to be general in nature and not tailored to your specific investing circumstances. This means that you should talk to your regular Gensler wealth advisor or your own advisor before acting on any information we discuss today. Nothing in this podcast is intended to be a solicitation and past performance does not guarantee future returns. Be forewarned, we are going to use a four letter word many times during this podcast and that four letter word is spac. Today on the unlimited podcast, we welcome Jamie wise, president and CEO of Periscope Capital, where the focus is SPACs and SPAC arbitrage. We'll tell you what that means. We hear Jamie's advice for young folks starting their careers and you'll even learn how Jamie unknowingly helped me achieve good grades. Let's go.

Foreign.

Welcome everyone to the Unlimited podcast. Before I introduce my guest and we have a great guest today, I'll tell you a little bit, a little story that gets to the introduction. So back in 1998, I guess I was in my first year of the HBA program at the Ivy Business School, University of Western Ontario. And HBA was a big change from the first two years of university. Very intense, lots of work, difficult, but I loved it. And as we're getting to, you know, the end of the year and the culminating exams, everyone's nervous, big, big end of the year. And we kept hearing about this really smart guy a year ahead, the smartest guy in the class and was friendly with a few folks in my class and somehow he was very kind enough to share some of his study notes or notes that he had taken in class as sort of his prep for his exams and, and, and all the great things, I guess that he did as he was a student in HBA the year ahead and his name was Jamie. And we were lucky enough, I was lucky enough to get access to some of Jamie's study notes and used it to help prep me for my work and actually do very well in the HBA program. And later on I met this, this very smart guy. And that's our guest today, that's Jamie Wise, who's the president and CEO of Periscope Capital. And I'll give you a little bit of Intro to Jamie. But I have to thank Jamie now personally because I don't think he ever knew this story that he helped me succeed in the HPA program and he was the gold medalist, so the number one, you know, student in the class a year ahead of me. So Jamie, thanks. Little did. Little did you know that I'm partially here because of you.

I guess zero did I know. Thank you for those kind sentiments and that warm introduction. I did not know that. I recall finishing up at Ivy, which was a great experience. I loved it as well and it really set me off on my path and career and going straight down to New York to start my career at Citibank, which turned into Citigroup. And in June, just a couple months after I graduated, I remember walking into the trading floor and head went down and off to work I went. And I even missed graduation because I couldn't get back for that. But great stories and triggered a whole bunch of nice memories. So thanks for sharing that serious worker there.

You. Yeah, well look, so thank you very much and thanks for joining. Just a quick intro to Jamie. So as I said, president and CEO of Periscope Capital and we'll learn a lot about what Periscope does today with a particular emphasis on the SPAC arbitrage strategy and we'll explain all that. Prior to launching Periscope in 2009, Jamie was a managing director at Moore Capital Advisors in Canada, which was a multi strategy Canadian focused hedge fund. Prior to Moore, Jamie was a managing director and portfolio manager at the bank of Montreal BMO where he led an internal proprietary trading group. And at bmo, Jamie was appointed. I see a theme here. Jamie was appointed the youngest managing director in the firm's history, has an undergraduate degree, as we just mentioned, from the Ivy School of Business, graduating top in his class and he's a CFA as well as I am. So again, Jamie, welcome. Thanks for your time, really appreciate it. And wanted to get into a little bit about what you're doing over at Periscope.

Thanks so much and thank you for having me. It's great to be here.

Yeah. So you know, we told a little story, gave a little bit of background, but maybe you could just for the listeners actually give us a little bit more color sort of graduating hba and how did you go from there to Citigroup as you just mentioned, then sort of onwards to Periscope, like what were some of the big sort of steps along the way and things that sort of helped you get to where you are?

Yeah, it's fun to relive the journey. One thing that was interesting when it was our time at HBA in business school was trading really wasn't a thing back then. So most of the jobs in business school were capital markets. So investment banking, consulting and then call it consumer product businesses. Procter and Gamble, like those sorts of companies. I was very interested in trading. I always loved sort of math and numbers and we'll talk a little bit about arbitrage like strategies. And so I needed to find my own way down there. And one thing that Citibank did back then was they ran this trading game where they would come to campus and it was a foreign exchange based trading game. Um, and it was just.

I did that one, I remember that it was unbelievable.

Unbelievable. So great experience, I loved it. Um, I remember the closing dinner. I was just lucky enough to be sitting next to the head of fx who was a Canadian, Jeff Faig was his name back then. And he invited me down to New York to kind of meet and possibly interview with the team. Um, and I did that and I remember that, that journey down and spending time with them. And he walks me over to the equity derivatives desk. Equity derivatives are financial contracts derived from stocks and can take various forms such as options, futures swaps and equity linked notes. These instruments enable investors to speculate hedge risks and gain exposure to stocks without direct ownership. With predetermined prices and dates, equity derivatives offer opportunities for trading, risk management and portfolio diversification. To introduce me to a fellow named Michael Bigger, who was French Canadian, probably the biggest personality I had ever met. Just beaming with energy and excitement. And I had really an opportunity to join both groups. And while I have to thank Jeff for bringing me to New York, I ultimately chose equity derivatives and went to work with Michael and his team or was hired to work with Michael and his team. And then before I graduated, Citibank announces the mega merger with Travelers to become Citigroup. And I recall thinking to myself, wow, this is, you know, obviously big news. I'll wait a week or two and let it digest and then call Michael and see what, if anything, this means. I call and his, his sort of number two answers the phone, a gentleman named Pat Parcells, and says, well, Michael left the bank, so welcome to the real world. So I never had that opportunity to work with Michael, but Pat said to me, you know, you're young and it wouldn't be a good look for us to not honor our hiring commitments. I expect you should come here right after school ends. So they're is a little history on the story of why I went right down to, to work right after graduation and didn't make it back for graduation because I needed to get on the desk. And fortunately for me, I was working at that time in the Canadian equity derivatives side of Citibank. They had a very good franchise back then. All of the trading was managed out of New York, but they had pods in Canada, Toronto, Calgary, Montreal, where everything was over the counter. And it could have been single stock options, index options, structured product, Delta One swaps. Delta One products are financial instruments designed to closely mimic the price movements of an underlying asset or index, providing investors with exposure to that asset's performance. Really the gamut of equity derivatives. And I got to work closely with the head trader of that business, learning that business. And then about a year or so later, the merger kind of was finalized. All the trading moves down to Tribeca, to Solomon's offices, which was owned by Travelers, and a totally different culture than Citibank. And the gentleman who is the head of the Canadian trading business did not make that move. He decided to leave at that time. And Salomon had absolutely no Canadian equity derivatives trading business. And so Andy Constan, who's big financial Twitter guy, if anyone's on Twitter, you should follow Andy Constant. I think he's at Damp Spring. He looks at me and says, well, you're Canadian, you know this book. Congratulations, you're now head of Canadian equity derivatives trading. I was 24 years old, so that was a great way to learn the business, really with great support. And I spent three years in New York, ultimately coming back to Toronto. My partner at Periscope, Steve Elgee, was a life of life bank of Montreal guy built and ran their Canadian equity derivatives business or their entire equity derivatives business. And I was hired to do prop trading from that platform. Prop trading in 2001 was still a very good thing, many things.

What's prop trading mean?

Prop trading means using the bank's capital for proprietary position. So taking risk on behalf of the bank with their capital. Not quiet facing at all, just looking to earn a good return on that capital. It's very popular for banks to be engaged in that business, sort of pre financial crisis. Of course, some of the larger US banks went a little off the rails in their proprietary trading, that is the 2008 financial crisis. But outside of that, that was five years I spent working with Steve at Bank of Montreal, really as a buy side client to the rest of the world. And the things that we focused on or that I focused on, there were primarily capital structure Arbitrage. I think we'll talk about some arbitrage strategies later, but generally a host of proprietary strategies. I did that till 2006, when all of a sudden, even pre financial crisis, Canadian banks, conservative as they are, really weren't going to expand too much into proprietary trading. I think the group that I had assembled was as big as it was going to get. So I took an opportunity to go to the true buy side, where you have a fixed denominator, bank denominators are endless and flexible and experience the buy side at more capital. I did that for a year and a bit. And then of course, financial crisis hits and Periscope is born out of the necessity of the financial crisis. Where back then I was of the view that certainly the hedge fund landscape would change coming out of the financial crisis, but there was still room for hedge fund strategies to the extent they made sense, they offered protection, they were doing what they originally may be intended to do. And that being local in Canada, you know, we might be able to establish a little niche to non Canadian institutions who might be looking to access some of those traditional strategies and the Canadianisms surrounding them. And that's exactly what happened. So I re partnered with Steve Elgee. I like to say that he hired me to come back to Canada in 2001 and I pulled him into Periscope and returned the favor, I guess in 2000, late 2008, 2009.

Nice. Before we jump into a whole host of things that you just mentioned and we always, I always like to sort of define and clarify for our listeners certain things because some of these concepts may not be totally familiar to everybody. But the other thing I also tend to do throughout this podcast is try to think about, you know, characteristics of successful people and how do people do well and how they succeed. You know, as you said, like coming out of Ivy, there wasn't really a lot of. There was training, wasn't really taught at Ivy except for maybe this one simulation which, you know, I remember doing it. I had really no idea what the heck I was doing there. And you came out and were doing everything you've just described at Citigroup and elsewhere. How did you learn and figure you're dealing with the bank's money or, you know, prop trading as you've just described? This is these are serious dollars. How did you figure out how to put on these strategies and the different types of things that you did in this equity derivatives and other strategy strategies that you employed?

Well, you know, I think the most important thing is you have to have a real thirst for, you know, the specific activity that you're doing, you have to love it, you have to want to learn more about it. You want to absorb as much as you can when you're younger and you're going up that learning curve at a really steep rate. One thing I've never been shy to do is ask questions and keep asking, why, why, why? You know, it's part of the culture that I try instill at Periscope. If you're told to do something or you're just repeating a task, you don't really understand why you're doing it. You never really get the true depth of the problem you're trying to solve. And with equity derivatives, there are lots of questions to ask. Why are we doing this? Why are we pricing it this way? What is the risk? What will the risk look like if this happens? And then, most importantly in trading, you know, there's the expression you have to put some, some money on the books to really understand the risk, right? To understand how. So you have to be able to live through experiences. When I started in 2000, sorry, 1998, you know, we had the Asian financial crisis in 1998. The Asian financial crisis was a severe economic downturn that struck several Asian countries in the late 1990s, characterized by currency devaluations, stock market crashes, and high levels of corporate and government debt. So there was lots of volatility and lots of things happening in the book. And when I would question how we could manage those exposures, why were the exposures driving our trading performance? What was the risk? Where were opportunities? It was just endless questions of my teammates and mentors at the time. And then, and then also, you know, very importantly or as importantly, is understanding management styles and what, what sort of motivates different individuals. When you're running the trading book, you have maybe a different responsibility than the sales team. It may be more volume based. They may want to do certain deals or assume you might be able to manage certain risks. And I was always very conscious of not losing money or doing our best not to lose money. And, and how do you, how do different cultures. Citibank, I mentioned this earlier, had a very different culture relative to Solomon. And, you know, just understanding what drives those cultures, what makes those firms successful in those cultures, what, what risks can creep into portfolios based on those cultures. Those were all lots of early life lessons that I learned, really on the hot seat, if you will. So you have to learn them fast.

Nice. Makes sense. Eventually we're going to get to really SPAC, arbitrage and SPACs. But there's an evolution, I think, probably from when you started Periscope to getting to, you know, introducing some of these strategies. Can you give us a sense of sort of how Periscope evolved and the types of things you, you got into, if you want to use that phrase. But before, before even that, maybe can you just define for listeners what does arbitrage mean? And, and because this is, I guess, core to some of the work that

you're doing, that's a really great question that doesn't get asked often enough. What is arbitrage? Because the term is so loosely used in many ways, it's like saying what is a hedge fund? You know, and I think that the similarity between saying what is a hedge fund and what is arbitrage? Is we're omitting the word risk from that. Right. And you can have extremely risky hedge funds and extremely non risky hedge funds and similar for arbitrage. So if you look at the root of arbitrage, it implies very little risk to secure a profit, similar to the early roots of hedge funds. I would say the early roots of a hedge fund were very low risk, pure alpha, absolute return like strategies. Of course, that's morphed over time. When I think of arbitrage. I remember one of the early arbitrage strategies I was exposed to, and this is one that my partner Steve Elgee executed at bank of Montreal. We'll call it intra listed arbitrage. And what that means is there are certain Canadian stocks that trade on multiple exchanges, Canadian exchanges and U.S. exchanges. Think Bell Canada, Royal Bank. The larger stocks will usually do this, and the difference in price between those two exchanges should merely reflect the exchange rate. The shares are fully fungible is the industry term meaning I can buy one and settle it in a different country. They're the exact same share, no different characteristics. And in the olden days, we'll say, you know, 30 plus years ago when Steve started doing this, he was, you know, probably one of the first people to write an algorithmic code based strategy to automatically execute this. And he would joke that if there wasn't an arbitrage profit of at least 25 cents a share, it wouldn't be worth his time to execute the trade. What that means is he would simultaneously, at the exact same moment, buy a share on one exchange, sell it on another at whatever price difference, call it $0.25 or above, and immediately with zero risk, earn that $0.25. The position would collapse. That is the lowest form of Arbitrage, cleanest, lowest risk form of arbitrage that you can think of that completely does not exist today. Now, with the advancements in technology, goes without saying, the difference between those two exchanges will probably trade to the third or fourth decimal place, not 25 cents. So as those simple arbitrage strategies go away over time, most arbitrage strategies do, people expand out the risk scale. You hear lots of merger arbitrage or risk arbitrage. What is that? It's buying shares in a company that's about to close a merger with the hopes of earning the discount of where it's trading versus where the merger price is going to happen. But of course that's far from riskless, because if the deal collapse, we all hear about left tail risk. That's the definition of left tail risk. Your share price plummets. Periscope was founded on closed end fund arbitrage. That was the first strategy we did when we launched our firm in 2009. Closed end fund is a like a mutual fund that trades on a stock exchange. It holds a collection of public, usually publicly traded securities. And usually because it's publicly traded, it doesn't have to trade at its net asset value. In Canada, there was a unique feature to closed end funds where they were redeemable once a year at their net asset value. So we looked for opportunities to buy them below net asset value, hedge as best we could, our knowledge of the underlying risk in the portfolio and then collapse that at NAV once a year. There's capital structure arbitrage. I referred to that earlier. That is the relationship between maybe debt and equities of the same issuer. And you can think of it as pure debt or pure equity. Or you could think about it in terms of other risk metrics, which is the way we used to trade the strategy credit spreads, which was a measure of riskiness of the bonds relative to equity volatility, a measure of riskiness of the equity portion of the capital structure. And there should be intuitively some relationship there. It would be unlikely to have something trade at a very high credit spread with very low equity volatility, or maybe vice versa, depending on the capital structure and if you have debt in the first place. So we would look to quote, arbitrage, those relationships. But of course that was a much riskier type of arbitrage than interlisted arbitrage, which I described before. And then we'll talk in great detail about SPAC arbitrage and where that fits in on the risk spectrum.

Yeah, perfect. I love those Examples. That's, that's great. Just before we get to the SPACs, one thing that I think is pretty interesting with some of the work you've done, and correct me if I, if I am wrong, but you've been developing investment strategies that use some artificial intelligence, machine learning. I'll let you describe it more, but you've been doing this, I think, for close to a decade, if I'm not mistaken. Whereas as of last Tuesday, everyone turned on to the fact that AI is going to, and machine learning going to, you know, revolutionize the world. No one, I think no one, except for those that were really in the, in the know or in this sector was focused on this. But you seem to have been doing this work for quite a while. Can you just describe the genesis of that just so folks can understand sort of maybe how, you know, forward thinking or, or ahead. You, you may be sure.

I, I, it has been a decade and I like to use the term journey for our work, the work that we've done over the last 10 years because it really has been a journey, a journey of learning and development and, and then ultimately today, you know, new strategy development. One thing just for context around that, you know, where I was fortunate in being assigned originally to Canadian equity derivatives was the market in Canada is much, much smaller, you know, than the US Market. And, and I saw this when I was down in New York. You could be a listed options trader trading the letters you know, S through, through Z and be very busy your entire life. And that's all you know, is trading single stock listed options in Canada. You have to be much more of a generalist when it came to arbitrage like strategies or equity derivatives generally, because there wasn't capacity and volume and activity to keep you busy in one very specific silo for a long time. So where I originally was trained on, you know, not just single stock options, but index options and structured products and Delta One products. When I went to bank of Montreal and started trading prop trading and did that alongside Steve again, it was a range of strategies that were looked at, whether that was closed end funder or Brisk Farb, anything that basically wasn't a pure equity was fair game. So it allowed for this generalist approach to sort of be rooted within the way we think about the strategies that we develop. And it also forced you to focus on strategy development because arbitrage strategies come and go. The example I gave earlier, interlisted arbitrage, gone Canadian closed end fund arbitrage, which we founded Periscope on gone right For a whole bunch of regulatory reasons, not because the ARB is gone, but a regulatory change in terms of fee disclosures and all of these things that, you know, where these products were sold to retail, they, they basically aren't sold to retail anymore and the market went away. So if you, you have to always think about evolving and think about new strategies. So that's where I come from, where Steve comes from, and where Periscope comes from, where we got into, if you want to use the, the term AI or machine learning or any of those things. It wasn't that back then. What I saw 10 plus years ago was more and more people congregating, gathering in online forums, talking about stocks. One thing that had always interested me as just an investor generally was the concept of sentiment and how it plays a role in financial markets and more specifically, setting price of financial securities, right? And for generations we've been told, you know, sentiment is a contrarian indicator and you should always fade it. But if, of course, it's not that easy because if it were, we'd all figure out how to measure sentiment and fade it when it was high. And then how do you measure sentiment? Do you listen to an expert? Do you look at the VIX V AX is a measure of market volatility and investor sentiment, often referred to as the fear gauge derived from options prices on the S&P 500 index. You know, sometimes it's predictive, sometimes it's not. So how do you get your hands around it? And my thought at the time was, wow, you know, if all these thousands at the time maybe growing into millions of people will be online sharing their perceptions of stocks, we could now quantifiably measure sentiment if you had a tool to do it, to say, and differentiate sentiment on stock A versus B versus C, et cetera, et cetera, et cetera. And I at the time just wanted to know that answer. I just was interested in the research of it. How do we go about doing that? How do you go about getting that data and scoring it, measuring it? And at the time there was a few firms selling alternative data sets and we met with a few of them. And it was still really early days for financial market sentiment. There was a hugely developed ecosystem around consumer, product and brand sentiment and all those things. But it was very early for data providers to be talking about financial sentiment at the time. And the view into their data sets was very opaque. You couldn't understand why they, you know, they might say here our model says sentiment on stock A is, is high. And you would Say, well, why and what data? And explain to me how your model was trained. And it was a fumbling like answer. And so part of being a derivatives guy, I always like to build versus buy and know the guts of the models. So I said, okay, we're going to have to figure out how to build our own sentiment models and what does that mean? And down the street to U of T we went where Jeff Hinton was still in charge and they had a wonderful computer science program and you make friends with a few professors and hire some really smart people. And lo and behold, we started building our own computers with enough horsepower Nvidia graphics processors 10 years ago, everyone knows about Nvidia today. Back then it was still crazy because of gaming. And they would release a GPU and we would be online trying to buy the processor to fit into our box, you know, before AWS existed and all this. And we, we built our own systems to be able to build our own models, handle the data set and start measuring it. And one of the first projects we did led to the creation of this thing called the Buzz Index, which you may or may not be familiar with. It's been around now since 2015 and it's been licensed in various forms to different ETFs. But really what we developed and I feel strongly about this was it's a measure of aggregate sentiment of large cap us equities. It's the sentiment factor. It's that thing that I wanted to know all those years about, you know, empirically actually measuring sentiment with data and then how does that perform? And it turns out when you observe it over seven years, we've had lots of market environments now over seven years. It's like any other factor, frankly. Right, Brian? It's sometimes value, growth, size do better, worse, it's just a factor. And the sentiment factor is something completely different than those that in certain market environments has absolutely crushed it. It has completely underperformed in different market environments. But it delivers you aggregate sentiment. That's what it does. And where our research has taken us to that and it's a long story, but I'll try and quickly summarize is trying to extract, you know, how do you extract signals from this massive data set that we've accumulated over the last, you know, eight years of doing this? And the answer to us wasn't that it's, it's not a quantitative signal. It's an idea generation engine, right, where we've got tens or hundreds of thousands of people talking about stocks. How do you think about who to listen to, how to organize those people, how to extract really actionable alpha ideas out from that noise that could be predictive, contrarian or just noise. And that's where all of our research has gone in the last three or four years. We've got a whole data science team that does it now and we have a Periscope fusion product that's been under beta testing for a number of years through one of our institutional relationships that I expect you'll hear more of in the next year. But really exciting stuff. And, and I will say ChatGPT for those of you who haven't played around with it. It is unbelievable. All those sentiment models that we built and spent years building and crafting, it's commoditized that you know, you can put in any sentence into chat GPT and ask it to measure the sentiment from a financial perspective and it will get it right. 99%. It is just amazing. So again, you know, now again that's an arbitrage that's gone away. So you know, the first competitive advantage was having the technology and writing the models. That competitive advantage is gone for everyone. So now we're all have access to the same data set essentially just like we're looking at, you know, no different than looking at stock price history. You have that but now what do you do with it and how do you extract from that? And that's, that's sort of where our research is focused. Amazing what the journey continues.

Yeah, it sounds like it. And I wanted to get a little bit of this background for listeners to understand sort of your journey and how your brain works and your sort of jumping on opportunities or arbitrage that you may see before others see it. Because it sounds like you have a history of doing that. What's the buzziest or most sentiment stock today?

Well, if we look at the Buzz index, you can follow that investwithbuzz.com but interesting enough, what's on the top of the list? Top two names, Nvidia and Palantir. Okay, maybe not.

I would have expected Palantir, maybe not.

Okay, yeah, cool. Okay.

This is not investment advice.

Listen, this is not investment, this is passive. This is rules based. So really an index, remember, is a rules based approach. And so it's not Jamie's opinion, it's not Periscope's opinion, it's of this data that we measure and score all the sentiment in an aggregate way. What is aggregate positive and sentiment or large cap US equities? It's a whole rules based process. Out comes the index it's rebalanced each month.

Right.

That's how that process works.

Very cool. Well, I want to, I want to get to how you arrived at the SPAC arbitrage strategy as well, because that's sort of the core of this call. But before we get to how did you get there, maybe we can go back to the basics. We call it, let's call it SPACS 101. What is a SPAC? What's their structure? How do they work? Because I think a lot of people are familiar with them, but not nearly as much would be familiar with other sort of financial products out there, equities in general, IPOs in general. And SPACs have had some huge frenzy at one point and maybe not now. So anyway, let's just go back to 101. What's a SPAC? How does it work? And that I think will naturally lead into. Oh, and so where did this opportunity come from to launch a strategy?

Sure. So SPACs are nothing new. SPACs have been around for over 30 years in one form or another. But the basic shape of a SPAC has looked the same for 30 years. And nobody really knew what SPACs were until 2020. Or it was a very niche part of the market. Essentially what a SPAC is, it's, it's like a blank shell company. It raises money. In a traditional ipo, it is, quote, sponsored by an individual or a group of individuals who should have some experience either in capital markets or certain industry or a certain sector. And those individuals are looking to merge their publicly traded SPAC vehicle with a private company, allowing that private company to begin its public life. Okay, and so that stands for Special Purpose Acquisition Company Corporation. So that is a spac. So that is, its special purpose is to identify a market, public market ready private company and allow it to begin its public life through its existing public listing. So a SPAC does a traditional ipo just like every other traditional ipo, except it has no business other than it's looking for a company to merge with. So it raises a pot of money. That money goes into a trust account that the sponsor team has no discretion or control over. It mandated to invest in short dated US treasuries, it is managed by 95% of the time, Continental. So it's money that's put aside. And if the SPAC team, the SPAC team will have, the sponsor team will have some timeframe, somewhere between 12 and 24 months to find a, what's called a qualifying transaction or a merger, a business combination. And if they don't then the shareholders of the SPAC get their pro rata money back from this, from the trust account. And the cash that's in the trust account has been earning interest over this time period. And if they do, then you know, the shareholders of the SPAC can choose whether they want to participate and remain shareholders in the go forward company or if they'd like to get their money back. There's no drag along or carry along type rights. If everyone wants to stay and you want your money back, you get your pro rata share back. So you're never forced to invest in something you don't want to. And when a SPAC does its IPO, typically they're done at $10 per unit, not per share per unit. And how SPAC IPOs are priced is it would come with one. A unit will comprise of one share and some number of warrants. It could be a half a warrant per share, a full warrant per share. Sometimes there's a right attached to that for a certain number of shares that they do a business combination and then after two months of trading that unit, they trade on New York Stock Exchange or Nasdaq publicly traded exchanges. That unit will separate into its components. So the share and the warrant will trade separately with different ticker symbols. And you can invest the warrant mean or do so the warrant allows the holder if the sponsor team successfully closes a qualifying transaction, the warrant lives on as a five year warrant on the now public operating business with a strike price of $11.50 relative to the $10 price. So you've got a relatively close to the money options term option and it lives for five years and that's the warrant. Right. And that can have a lot of value if you close a qualifying transaction. Flip side of the warrant is if you don't close a qualifying transaction, they expire worthless and they're there are nothing. Right. So traditionally what you would see is you would buy this SPAC unit at $10 and then two months later it would separate. The warrants historically would trade around 75 cents for a full warrant. The SPAC share might be trading at 960 or 970. Knowing that it has as a shareholder, you can get your $10 back in the future. So there's a yield component as it would accrete from wherever it's trading in the market up to that $10 plus interest level. And you as an investor can choose to hold one, one or the other or both, depending on your view of the sponsor team. And we'll get into all of that. So that's, that's what SPACs are. That's spacious 101. The key difference between some blind pool companies that some of your listeners might be familiar with versus or capital pool companies versus a SPAC is deadline and return of capital. So in a, you know, maybe a capital pool company can exist forever. It could trade at any kind of discount or premium to its nav or cash value. But you as an investor never have an opportunity to realize that because there's no redemption mechanism. The, the thing that differentiates SPACs is there is a redemption feature that has to occur within two years depending on the terms of its original IPO. And now the next 101 question is, well, why do these things exist? Why don't these public private companies just do a traditional ipo? Yes, and the answer is a traditional ipo.

That's my question already. I could let you just do the interview.

Well, the answer is to my carefully crafted question. A traditional IPO doesn't necessarily fit every private company. It is typically an arduous process. It would typically take around a year from the time you decide you want your company to become public before it would actually price and happen. You're typically really subject to the valuation whims of the market at the day you IPO in terms of setting your firm's value. So you would hire an investment bank and they would put together a nice pitch deck and you would spend that year doing a whole ton of regulatory filings and going on the road and meeting with prospects and trying to triangulate into a valuation that you think the market can digest. And then, you know, you go to price this ipo, and if it's a terrible market, you now have to cut your valuation. If it's a good market, maybe you benefit from that. And you also have to get the banker's attention. So depending on the size of your company, that might be easier, harder to do. And depending on the management team at your private company, you may or may not have the capital markets expertise to navigate all that really efficiently. The other sort of headwind argument against a traditional IPO is there's a strong incentive from the underwriters to undervalue your company. So in the financial media, you read about traditional IPOs, and the stock was up 50% on day one. And isn't that wonderful? It's a massive success. Yes. But if you're the selling company, because you look at that and say, wait a second, why did you value my company at X? When the market values it at 2x immediately I just sold 10% of my company at half the valuation. I just left all this money on the table. Why? Why? That's not a good deal, right? Yeah. So the idea of the SPAC was to have a, have a structure that could align interests of the selling private company and a more concentrated group of day one investors that's organized around the sponsor team that might also do a traditional type of roadshow where they would go to more strategic investors. Look for day one, you know, pipe investing. But it would be a process that would likely result in a more fair valuation for the private company in day one trading. It would have a clearer investor base or more better alignment in the investor base. And often the sponsor teams would have the capital markets expertise that the private company may not. And so they add value to that process and help guide that process. Next question I would ask, why are the sponsor teams doing this? So the sponsor teams, of course, don't do this out of the goodness of their heart. They are looking for economics. So when they set up their SPAC vehicle, they are responsible for all the costs of setting it up, the operating costs of their SPAC company that's looking for a qualifying transaction paying the underwriter fees. None of that comes from day one investor capital SPAC IPOs, that $10 that they raise, a hundred percent of that goes in trust. And none of that is used to fund the SPAC operating business in its search for a qualifying transaction to pay for underwriting fees. So there's real risk that the sponsors are doing in setting up these vehicles. If they're unsuccessful, they lose all that money. If they are successful, they're hoping to achieve, they're, they're looking to achieve a, a weight or a holding of the new now public company. Right? And that is a complex and highly negotiated issue. But nevertheless, if they're successful, they'll be very successful. And if they're not successful, it's a total zero. Sort of like the warrant, Right. You can almost think about the SPAC sponsor economics, a similar payoff profile to the warrant, the warrant structure of the trade. And so for a private company, they have to balance all of those different things, right? The costs, uncertainties, timelines of a traditional IPO, potential underpricing of their company versus a much quicker time to market. SPACs historically could complete a deal in months, not year plus, maybe better valuation, maybe better certainty. But now you've got the sponsor team part of your group. It's not one size fits all. Not every private company should do a traditional ipo. Not every private company should come public via spac. Every situation, every deal is unique.

Right. And so how big is this market and maybe today versus as you said, people just heard about this in 2020. Like how big is this relative to IPOs or the markets in general?

Yes, before, before SPACs had their moment. This would have been back in around 2018 when we launched the Target Return Fund. The SPAC market, the size of the seeking SPAC market, meaning SPACs that were looking for qualifying transactions, they haven't announced it yet, was somewhere around 20 to 25 billion of trust value. And we at that time believe there were some changes that happened in 2015. We'll talk about those. We believed that this, this structure was going to be sustainable for the future. It's why we launched the fund, that there would be that kind of size market going forward. And then 2020 happens and the market balloons to $150 billion of trust value, you know, 500 SPACs looking for qualifying transactions. And since then, as time has gone by, remember they have this window to find an opportunity and issuance has obviously slowed down dramatically. We're now back to a SPAC market that's about 32 billion of trust account value looking for qualifying transactions spread out over around 240spacs.

Right, okay, so. And sorry. And so back in 2020, what was all the frenzy about? What is. Was it just we had so much money sloshing around, if anyone potentially had a good idea and could find a good company, we'll just put money in the trust and hopefully it all works out great or.

Well, it wasn't necessary. It was a risk environment that was a perfect storm for SPACs but other types of security. So it wasn't only SPACs, certainly as interest rates went to zero and access to capital was just flowing because of COVID So not only were was the government pushing liquidity into the system, they were literally mailing people checks and everyone was at home. It was, it really spurred this massive surprising to many. I don't think anyone saw it coming. You know, Covid market kind of crashes within three months. It was this euphoric risk on appetite. Again, not specific to stocks. So any kind of thematic future tech, hope and dream stock, whether it did a traditional IPO by way of a SPAC didn't matter. They were just off to the moon, right? Any kind of technology, any Internet. So like just rocket ships straight up. And so we were living in that environment coming out of COVID And then a few new sponsors entered the mix Most notably, Chamath. Chamath Palihapiti is a prominent venture capitalist and entrepreneur. He is known for his early work at Facebook and his investments in activism and technology and sustainable solutions. He is also one of the hosts of all in, one of Brian's favorite podcasts. And Chamath became. It was almost missionary work for some of these folks, right? Just you know, pounding the table on why SPACs were going to be IPO 2.0 and how they were so much better and how they had this ability to merge with some of these high growth, high flying companies. And it was the perfect structure to do it. And everyone bought in, everyone from the retail investor to CNBC to the financial media. And we start seeing, you know, where we had this 20 to 25 billion of trust account, we start seeing like 5, 10, 15 billion of dollars of issuance a month and any qualifying transaction that a sponsor would propose almost, you know, the crazier it was, the more the market wanted it. And that had nothing again wasn't SPACs. It was the risk appetite of the market at large at that time. You know, even, even a name like Shopify or you know, a big established brand, you know, that stock went up tenfold during COVID right. And of course it's then went down 90% and now it's kind of coming back. And SPACs were just sort of mixed in for a time with all of that. And what was even more strange for us was seeing the market's reaction to announce qualifying transactions where that thing that was trading at 10 immediately was trading at 15 or 20 on any announced deal. And remember, one of the first things I said was the whole purpose of a SPAC would should be to find a more fair or appropriate valuation for a private company. So to the extent it was accomplishing that, it would be odd that it would be doubling on a day of an announcement like a traditional ipo because it shouldn't even be as undervalued to begin with. But nevertheless it was a symptom of the market. Great for the strategy because we could still be disciplined in monetizing all that upside that that's the right tail. We're going to talk a little bit about left tail and right tail, I'm sure. But that was, that was this market environment that we lived through that has of course completely round tripped not just for SPACs but all those high flying tech names that went up tenfold and then came back down 90%.

Right.

But did not have the principal parent action characteristics around that. The SPACs ranch yet. We'll talk about that too.

Right. So well let, well, let's do that right now, actually. So, yeah, you've talked about some frenzy and the SPACs went up, SPACs came down. But you have created an arbitrage fund or an arbitrage strategy around SPACs and you've defined very well what arbitrage is. So what did you see in this SPAC structure? And you've described it very well, so it probably should be easy, I hope, for listeners to understand as you go through this. But what did you see in this SPAC structure that made you say, aha, here's how we can sort of get some sort of elements of an arbitrage. And when I describe your strategy to clients and full disclosure, we do invest in your strategy. For our listeners, I have to say that from regulatory purpose, we like the, what I call the asymmetric return profile of this strategy. But you're better to explain it than I. So what did you see and how does it work? Where's the arbitrage here?

Yeah, so you know, SPACs were a structure, like I said, it's been around 30 years. We were familiar with it. There was a couple changes that happened to that structure. One real notable change around 2015 which revolved around the voting rights upon the announcement of a qualifying transaction. So in the, you know, the first version of SPACs before 2015, when a sponsor team announced qualifying transaction, you as the shareholder had two choices only, which was I don't support this transaction, I want my money back or I do support this transaction and I will continue to be a shareholder. In 2015, Clever Investment Bankers added a third voting option which is I do support this transaction, but I still want my money back. Right. And seems odd, but it's a massive change. And the reason is it allowed for the maturation of this back structure and more serious sponsor teams and investment banks get involved and I'll explain why. Prior to that it was very difficult for a sponsor to get a deal done. It had to be so compelling that people were willing to take post de SPAC risk and stay in the deal. Otherwise they would vote against that deal. For investment firms like ourselves who don't want to stay in, it's not our mandate. We're not fundamental. Whether we love the deal or not, we're not fundamental stock pickers in this strategy. We want, if it makes sense, to be supportive of a transaction, but we want to make sure that we never risk principle and that we can always get our money back. So by allowing that third voting option, it allows the sponsor team to go and replace that capital ultimately right go out and find who is the right investor to stay here for the long time, for the long term and turn over the shareholder base appropriately. Whereby I can say, you know, I still want my money back. And they say great, we're going to replace that money with a pipe from Fidelity or from Wellington or a more traditional long only manager. And once there became that de risked the sponsor economics because they had other ways of closing their deals. And as soon as you de risk that sponsor economics, the first new wave of sponsors coming the market were serious sponsors, you know, Blackstone, tpg, high quality private equity firms like and, and that it, you know, welcomed in the Citibanks and UBS and Credit Suisses of the world to underwrite those deals and we could see the maturation of the space. So in 2015 as we got we said there's, there's a chance SPACs are going to become a permanent thing in capital markets, an established thing because of this. And we started deploying to the arbitrage like strategy for our institutional client at the time back in 2015. The arbitrage is simple. If you hold the SPAC from the life cycle of its ipo, a SPAC IPO and exit that SPAC at the latest at the vote where I'm asking for my money back, never taking de SPAC risk, you always have certainty of principal protection. As long as you're not buying over trust value, you will always have your principal back and you will earn a yield in the interim for doing that. So that is the arbitrage. The arbitrage is typically SPAC shares had traded at implied yields higher than the treasury rates that they were earning in their trust account. So I could earn a return that was higher than treasury rates for taking treasury risk. And if I'm earning that higher return I could also apply leverage to that. So now I could earn a high single digit return for treasury market risk. That is an arbitrage. And if we think back about the risk spectrum of arbitrages, that's on the low end of the risk spectrum. As long as I don't forget to vote at the end and say I want my money back. Because if you don't vote you end up a shareholder. So as long as you don't have that forget or have a mistake on the vote, you will not have your principal at risk. And that allows that takes the tail from traditional like a risk arb strategy where if the deal doesn't go through. It's all that left tail risk. You lose a ton of money here. You don't have a left tail unless you have a mistake on the reorg at the end. But you have this right tail that says if the market loves the deal or even likes it a little, I don't have to sell it for the $10 trust value. I can sell it while I still have the ability to ask my 10 back. But after a deal is announced, you know that three to four month window I was talking about on closing the deal, I might be able to sell my position more than 10 and add incremental returns to the strategy, which from 2015 to 2020 happened about 10 or 15% of the time. And then all of a sudden the, you know, the average trading price might have been 1050, 11, 1150. Not euphoria, but just a good deal. A deal that the Fidelity manager might say, I think this thing is worth 15 in the long term, so I'll pay 11 for it today to get a lot of it right. And that adds returns to the strategies when we go through 2020, 2021. Then it went bonkers. And every single deal was trading at 15 or 20 with no downside risk. And so as long as Periscope stayed disciplined to monetizing that and not falling in love with the rocket ships and the electric cars and the batteries that will be manufactured on the moon, we could take all that money off the table without ever taking downside exposure in the fund and just keep recycling it, recycling it and recycling it. So that's why I mentioned this earlier. Even though a lot of those deep companies, or even the shopify of the world that went up tenfold and fell 90%, this, this strategy doesn't have exposure to it. As long as you stay disciplined in the box of coming in at high spac, ipo, leaving by qualifying transaction, you won't lose money. But you have all that upside. And that's why you don't see, you know, it's not huge mark to market gains followed by huge mark to market losses. It's harvesting gains as they come all realized.

So, so there you go there, you've described it that, that asymmetric risk, I guess, downside protection with upside potential.

Right. And you know what was very hard for so many managers talk about searching for asymmetric risk. It's a holy grail really in the hedge fund world. And here is a structure that actually delivers it, which makes a lot of people think they must be missing something. And that was part of the reason that the market grew so quickly and started trading at a premium to their trust value. Because any kind of option theory will tell you, if I own an option, whether just embedded in the SPAC share, you own an option of it, maybe trading higher on a good deal announcement, that option has value. And so when you own an option, you usually pay for it. And if the option doesn't pay off, you lose that value. Here in SPAC arbitrage, you're actually being paid by way of the yield to own that option. So as a derivatives guy, you can imagine Steve and myself are like, we're getting paid to own equity call options. That's a great trade. The only way you can mess it up is losing your discipline or if you forget to turn it in, which, I mean, we could spend an hour talking about our processes around that. But you don't forget, right?

And so does that mean that. And again, I hope this doesn't sound bad and you'll correct me if I'm wrong, but does that mean basically any stack that IPOs like you, it's a potential candidate for you, is there a reason why you don't buy every single one? Like, how's the decision process? What assuming, assuming they all have the principal protection characteristics, how do you decide which go into the fund and which you pass on?

Yeah, great, great question. So I will say every SPAC that is issued is eligible, right? If, if a SPAC share is trading at a wide enough yield to its maturity date and we can earn the target return of our fund by buying it, there's no reason not to buy it, right? However, we do care greatly and deeply about the sponsor teams. We have dedicated people on our SPAC PM team whose sole job it is to interact and liaise with capital markets and sponsor teams. Why do we do this if we don't ever plan on sticking around and being long term shareholders? And the answer is we are trying to in some ways handicap the potential of that sponsor team being successful in their journey. So we want to get to know them and say, why are you doing this? What's your experience? How do you plan to behave in certain market environments? Does your target make sense? Does your whole business case make sense? And we assign almost like a rating system to each sponsor team where we can kind of evaluate them primarily. What that can do for us is govern our decision making around warrants. Meaning after SPAC does ipo, two months later, the warrants are trading separately. Do we as a SPAC manager want to sell those warrants that day, do we want to hold onto them longer into the life cycle? We're not going to hold on to them after they do a deal. But at what point along that life cycle and journey is it may be optimal for us to sell? That's a fundamentally rooted decision. It needs to be. And the only way to have that view is to meet the sponsor team and form a fundamental view on that sponsor team. So that's, that's one of the reasons why, why we care, we do believe and we always have held a very diverse portfolio of SPACs. So it's not about for us identifying the 20 sponsors we like the best and really having concentrated positions. I've seen many, many times since 2015 where a sponsor team that you might not be constructive on pulls the rabbit out of a hat and finds a deal that no one expected that the market somewhat loves. And you want exposure to that. Right. You still want to. So diversity is important in this strategy. So we run a diverse strategy, diverse portfolio and we, we govern our kind of mandate around warrant monetization, more fundamentally driven based on our underwriting of the sponsor teams.

Okay, so you've been doing this now since 2000, this strategy since 2015 or strategy since 15.

The fund launched in 2018.

2018. So how many positions have you held over that history and what's been the experience in terms of the result of ultimately when you get out or sell those positions?

We've, we've held north of 600, maybe even 700 SPACs since we've started doing this in 2015. I think we have a realized loss on three of them. So it's 99 point something percent. The reason was it would have been maybe a poorly received IPO that we got a small allocation on, bought it at 10 and sold it at 998 just to take it off the books and not look at it anymore. Right. One of those sort of situations. But it is so, so, so rare. It again, it comes to the discipline. If you are buying things at or below trust, you know you are getting trust value back at the end. And we live very tightly in that box in the fund. So it's about realizing gains that the fund, of course SPACs are publicly traded. So you can buy a SPAC in the secondary market at 9:70 and it can go to 9:50 or 9:60 but it has to be redeemed. So again, one other risk in the strategy we should talk about is the use of leverage. I mentioned leverage before and leverage always works both ways. And something that's important is to make sure that we always have enough cash cushion so that if a stock or all the specs in our portfolio go from 970 to 950, we don't become forced sellers because of leverage. That is a way to lose money in the strategy. And so how much leverage, what's the appropriate cushion, what's the downside of the portfolio? You know, we typically keep 30 to 40% of excess margin room in the portfolio. Think of what that means. If every SPAC went down 30% and you're using three times lever, you know, 30% is 30 cents on $10 times three, that's 90 cents. Every SPAC would basically have to be trading at $9 a share before it would be close. Nowhere never has it ever become close to that close. When in, in March of COVID was the most distressed all markets were at that moment. There was probably a moment in the middle of March for a 24 hour period where the average SPAC was trading around 9 60. Right. And by the end of the month the trust value is and it's such short dated. So the duration of the strategy is, you know, short dated. Typically the duration is much tighter today than it has been historically. But even back in Covid, you know, the average duration of the portfolio is probably a year. So you're not dealing in, you know, 10 year trusts that someone's happy to sell down because it's going to take you 10 years until you're eligible to access that trust. The duration's short enough and it's not credit risk, it's treasury risk in the trust that even in severe market dislocations you don't typically see real dislocations in Spackland.

Right. Where are you seeing this strategy fit in? If you see, I'm not sure if you see this for your investors, but where does this fit in into a portfolio? Is this a replacement for something? Do you do this instead of bonds or how do you describe that to people that might say to you I have a portfolio, what should I put in? What should I take out to make room for this?

Yeah, we always view the strategy, look, it was incubated in 2015 for a pension who had very low risk looking for fixed income alternatives in a low interest rate environment. Right. We've always thought of the strategy as a primarily a fixed income replacement strategy. Right. The risk profile of the strategy is short term treasury risk. Right. So that if you are replacing something, you should be replacing a short term fixed income portion of your portfolio. And consider this strategy as it could may offer, should offer in our opinion a better return than even in today's interest rate environment. You know, which 4 or 5% short term interest rates, this strategy should offer better returns than that for this similar risk profile. That's the arbitrage. So it's not an equity replacement strategy. Yes, you have right tail exposure and you have all this upside optionality and that can come huge as it did in 2020. It can come and take an 8 to 10% return strategy and make it a 10 to 12% return strategy as it did for many years before 2020. But at the very least the starting point should be, you know, principal protection, short dated treasury risk, better returns than

short dated Treasuries and treated as capital gains primarily.

And treat it as capital gains. Absolutely. Because we are buying and selling shares and even the interest earned in the trust account and consult your tax advisors. I have to say that as well. But just simply thinking about it, in today's, you know, for a long time interest rates were zero, it didn't matter. You bought us back at 10 and redeemed it at 10. But today you buy us back at 10 and in, you know, a year from now it's trading at 1050.

Right.

Because of interest rates being at 5%. If I just buy that SPAC at 10 and sell it at 1050, that's a 5% capital gain because I'm just buying and selling stock. There's no flow through mechanism of the treasury interest down to the SPAC shareholder.

Right. Beauty. Okay, well I think you've hit it. You conducted the interview bid on your own there in the middle because you knew exactly what I was going to ask. But I think we've covered SPACs, I think we've covered where this arbitrage opportunity is and I think we've covered sort of your history and how you got here. So that's, that's pretty amazing. But speaking of you and your history, the last question we always ask every guest before I let you go here. So you know us, you know our theme here, your wealth unlimited. Because we can look at a whole bunch of different things for clients and do really whatever client needs need on the financial side. And so we like to ask our guests if you could start again. The world is unlimited. The world's your oyster. You can do anything you want. Maybe you know, not doing running Periscope, like what would you be doing right now if you could do anything in the world? Unlimited options.

Well, I'll say, Brian, I'm a Nice

two guitars behind you, by the way. But I'm not.

I wouldn't be a rock star. I would probably be in my canoe up north in Algonquin or Colony or me and, you know, heading out, camping. That's always my favorite thing to do. But I will say I'm certainly an optimist on our world and opportunity. I know there's a lot of this AI and just, it's exciting and good times and try not to be overwhelmed by the negative narrative that you read. The productivity and utility of, of these tools is incredible. If you're a young person today starting out, roll up your sleeves and dig into it because it's really terrific. It's a terrific time to be part of the economy in the marketplace and technology. So I, I love all that and I'm very optimistic for the future. It's better to be optimistic, but if y' all get some time off, I put the canoe on the car and head out.

Well, that's. That's my love as well, as you may or may not know. And I'll tell you, AI and tech is amazing, but it's never going to get into that canoe when you're on the lake in Algonquin Park. So you get to separate yourself from that. All the advancements in the world here. Listen. Jamie, thank you so much. Really appreciate your time, really. Hopefully listeners found this to be a really interesting and unique strategy. We do. That's one of the reasons why we like it and always been, you know, pleased to speak with you and hear what you're doing and, and wish you continued success. And thank you so much.

Thank you. Great to be here.

Okay, all the best.

Thanks, Ryan. The Unlimited podcast is hosted and produced by Brian Ginsler and is edited and mixed by myself, David McMillan. The opinions expressed in this podcast are those of the speaker alone and may not reflect others in the industry. All investments have risks, not all of which have been discussed, including the risk that there is no guarantee that an investor will not lose some or all of its money. This podcast is not to be taken as investment advice. If you like what you heard, don't forget to rate the podcast and follow us on social media media at Dinsler Wealth. Thanks for listening and see you next time.