Morgan Creek and EXOS launch SPAC arbitrage ETF

Feb 1st, 2022 | By | Category: Alternatives / Multi-Asset

Mark Yusko’s Morgan Creek Capital Management and Brady Dougan’s EXOS Financial have teamed up again to launch their second ETF.

Mark Yusko, CEO and CIO of Morgan Creek

Mark Yusko, CEO and CIO of Morgan Creek Capital Management.

Just last month, the firms debuted the Morgan Creek – Exos SPAC Originated ETF (SPXZ US) which invests in Special Purpose Acquisition Companies, or SPACs, and publicly listed companies that are born from them.

Often referred to as blank-cheque companies, SPACs are listed acquisition vehicles that are formed for the specific purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization, or similar business combination with one or more private operating companies.

SPAC investing has traditionally offered a means for risk-seeking investors to access untested businesses with high-growth potential.

Similar to the firms’ first collaboration, the newly listed Morgan Creek – Exos Active SPAC Arbitrage ETF (CSH US) is also an actively managed fund that invests in SPACs; however, its strategy could not be more different.

Specifically, the fund exploits the unique structural characteristics of SPACs in a bid to provide a short-duration exposure that earns a more meaningful risk-adjusted return compared to traditional cash alternatives.

The ETF aims to achieve this objective by investing in a diversified portfolio of pre-deal SPACs which are structurally collateralized by high-quality, low-risk instruments such as US Treasury bills.

SPAC regulations allow investors to demand their money back before a SPAC’s deal is completed, or once SPAC sponsors run out of time to find a target (typically two years).

While a SPAC is searching for a target, it may trade somewhat lower than the value of its collateral if sentiment for that SPAC, or in the SPAC market in general, is low. The announcement of a potential deal, however, often brings in new investors and speculators, driving the SPAC’s price well above its NAV.

The ETF aims to exploit this dynamic by building a portfolio of pre-deal SPACs in such a way as to optimize returns relative to the risk of the underlying collateral. In regards to the fund’s individual SPAC holdings, the ETF may end up receiving the SPAC’s underlying collateral or could benefit from selling the SPAC for a profit if its value has appreciated.

The ETF has been listed on NYSE Arca with an expense ratio of 1.25%.

Mark Yusko, CEO and CIO at Morgan Creek Capital Management, said: “There has never been a more challenging time to be a saver. Record high inflation and ultra-low interest rates make it extremely difficult for investors to make the most of their cash. Banks are paying close to zero and other cash alternatives like credit or longer duration bonds offer only a small incremental return but can leave investors with significant losses in the worst-case scenarios.”

Peter Early, Head of Business Development at EXOS Financial, added: “We’re thrilled about bringing this new ETF to market in collaboration with Morgan Creek. CSH is built for investors looking to earn a return on their liquid assets without compromising on safety. We do this by leveraging our expertise and extensive knowledge of SPACs while we have the ability to redeem our shares for the underlying collateral at some date in the future. This stage of a SPAC’s life cycle is unique because it offers the protection of the US government credit with the upside potential of equity, which is quite appealing.”

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