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How can I generate an arbitrage idea?


Mephistopheles
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I saw a job listing for an analyst position at a hedge fund through my school's alumni career services network. They are accepting applications for another week. I thought I should submit an investing write up along with my application in order to stand out. The fund's description says they focus on merger arbitrage, capital structure arbitrage, and relative value investing. So I was wondering if anyone has  an arbitrage idea that maybe I can do a quick write up about? Or if not, can you recommend how I can generate a good idea, that is fairly simple (as I only have 1 week).

 

Thank you for your help!

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Why don't you focus on what you know well? Stay in your area of expertise instead of trying for the home-run.

 

BeerBaron

 

Good point. Actually, I don't think I know anything that well really. I'm fairly new to the game. In that case, can anyone lead me to a way I can generate a simple idea for a write up? Like I said previously, I only have a week, so I can't do anything big.

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Google Credit Bubble Stocks for some good capital arbitrage discussion and ideas.  Check out the bonds or preferreds on some of the distressed names brought up as value investments on this board.  You are probably familiar with many of them since they have been discussed in depth here.  Think of who will file for ch11, and if equity will be wiped out as a result.  Or who will raise massive amounts of capital in secondaries, or do a big debt for equity swap.  Figure out which bonds will likely be the fulcrum security, then see if they or the class above them are cheap enough to go long bonds/short equity.  See if call options on the equity are cheap enough to buy to hedge a miraculous comeback.

 

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Good luck and be yourself.

 

I would add that this is going to be tough.  You are going to be up against guys that have been coming up with ideas like what they're looking for since they were 8 years old.  I would think your best bet is to try and come up with something out there and where the guy reading it says "this is crazy but it just might work".  Just try your best, that's all you  can do.  Remember that the key to getting this kind of job, if it's what you really want, is to have lots of poles in the water in order to do your fishing.  I used to hate this advice, but network.  Hit up any contacts you have.  Let as many people you know know that you want this type of job.  Good luck.

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Yeah, it sounds like you want to apply for one of the most wanted jobs in the world without any relevant experience and without much knowledge about the field either.  :) If we give you an idea and you "roughly" work it out in a week they will definitely find out if they grill you during the job interview and you will look bad. Your best bet is probably to come up with something very creative and to be honest about your lack of knowledge. I would suggest you read a boatload in the meantime, books (Ben Graham, Phil Fisher, Joel Greenblatt), the Economist, FT Alphaville, Seekingalpha to get up to date with what is happening in the markets currently. I wish you the best but others have better credentials though probably!

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CBI's propose purchase of Shaw Group is a pretty interesting arb right now - http://www.reuters.com/finance/stocks/CBI/key-developments.

 

Over a 9% gross spread and the deal closes in early 2013. Two key risks I've seen explaining the spread is CBI itself getting taken over and an activist buying  a stake in CBI (~$4B cap) and working to block the deal. The activist risk is plausible to me given the huge premium CBI is paying for Shaw and the likelihood of shareholder discontent. Though why would CBI do the deal without consulting with its shareholder base?

 

If you can handicap those two risks within the next week you may have a good proposal. Good luck!

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I'll offer some encouragement.  This is a job posting on a campus, so the hedge fund isn't looking for someone with much or any experience.  Also since this is presumably for an entry level position your competition will be other college students such as yourself.

 

So with that in mind I agree with whoever said look for something out of the ordinary.  Most of your peers are going to look at the same lists to generate ideas you would, and I'm guessing there will be a lot of candidates clustering around the same few good ideas.  So to stand out you need to be extremely articulate, or memorable.  Why not just pick something so out there that it's memorable.

 

I'll help you out, someone posted this on my blog, it's a bit of an arbitrage, it's a Dutch company with a weird shareholding, the comments are probably more insightful than the post itself: http://www.oddballstocks.com/2012/01/rella-holdings-profitable-company.html

 

Understanding Rella and recommending that will at least get you remembered.

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I've always thought hedge fund job job postings where pretty funny sometimes.  You'll see analyst positions with a requirement that you generate your own successful investment ideas.  If I could pull successful investment ideas out of a hat, why would I want to be your analyst? You become an analyst to move up the ladder in hopes that one day you can LEARN to generate your own investment ideas.

 

It'd be like saying, "Investment banking analyst position opening.  Must bring a large book of business."  If I have a large book of iBanking business, why the hell would I be an analyst?

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I've always thought hedge fund job job postings where pretty funny sometimes.  You'll see analyst positions with a requirement that you generate your own successful investment ideas.  If I could pull successful investment ideas out of a hat, why would I want to be your analyst? You become an analyst to move up the ladder in hopes that one day you can LEARN to generate your own investment ideas.

 

It'd be like saying, "Investment banking analyst position opening.  Must bring a large book of business."  If I have a large book of iBanking business, why the hell would I be an analyst?

 

This is just a specific example of more and more businesses abdicating any interest in training, and trying to build skill sets rather than just hiring *exactly* the right person who has done exactly the same job...and most people who fit that, why would they want exactly the same job they have now?  Then businesses complain about not being able to hire anyone. 

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You may want to pick up "Warren Buffett and the Art of Stock Arbitrage: Proven Strategies for Arbitrage and Other Special Investment Situations".

It provides an overview of different types of merger arb scenarios as well as special situations including formulas for expected returns, risk adjusted returns..etc. 

I'm sure there are more comprehensive merger arb books out there, but this is definitely a good start.

 

Heres the amazon link:

http://www.amazon.com/Warren-Buffett-Art-Stock-Arbitrage/dp/B0051BNWLW/ref=sr_1_1?ie=UTF8&qid=1345820803&sr=8-1&keywords=buffett+arbitrage

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Yeah, it sounds like you want to apply for one of the most wanted jobs in the world without any relevant experience and without much knowledge about the field either.  :) If we give you an idea and you "roughly" work it out in a week they will definitely find out if they grill you during the job interview and you will look bad. Your best bet is probably to come up with something very creative and to be honest about your lack of knowledge. I would suggest you read a boatload in the meantime, books (Ben Graham, Phil Fisher, Joel Greenblatt), the Economist, FT Alphaville, Seekingalpha to get up to date with what is happening in the markets currently. I wish you the best but others have better credentials though probably!

 

The posting specified that they are looking for someone with little to no experience. They want a beginner. While I am a beginner in the sense that I am not great at coming up original own ideas, I have read Graham, Greenblatt, and others. I also read a lot of financial press, including the WSJ, and value sites/blogs. The stocks I usually invest in are ideas of famous investors (AIG, BAC, JCP), so I can't really write about them.

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I'll offer some encouragement.  This is a job posting on a campus, so the hedge fund isn't looking for someone with much or any experience.  Also since this is presumably for an entry level position your competition will be other college students such as yourself.

 

So with that in mind I agree with whoever said look for something out of the ordinary.  Most of your peers are going to look at the same lists to generate ideas you would, and I'm guessing there will be a lot of candidates clustering around the same few good ideas.  So to stand out you need to be extremely articulate, or memorable.  Why not just pick something so out there that it's memorable.

 

I'll help you out, someone posted this on my blog, it's a bit of an arbitrage, it's a Dutch company with a weird shareholding, the comments are probably more insightful than the post itself: http://www.oddballstocks.com/2012/01/rella-holdings-profitable-company.html

 

Understanding Rella and recommending that will at least get you remembered.

 

Thanks, this seems like an interesting idea. But I have a general question in this case. If someone has already written about it, like in this case, can I really talk about the same idea, even if it's paraphrased? Wouldn't I have to add something new and significant to a piece like this in order to keep it original?

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I've always thought hedge fund job job postings where pretty funny sometimes.  You'll see analyst positions with a requirement that you generate your own successful investment ideas.  If I could pull successful investment ideas out of a hat, why would I want to be your analyst? You become an analyst to move up the ladder in hopes that one day you can LEARN to generate your own investment ideas.

 

It'd be like saying, "Investment banking analyst position opening.  Must bring a large book of business."  If I have a large book of iBanking business, why the hell would I be an analyst?

 

This is just a specific example of more and more businesses abdicating any interest in training, and trying to build skill sets rather than just hiring *exactly* the right person who has done exactly the same job...and most people who fit that, why would they want exactly the same job they have now?  Then businesses complain about not being able to hire anyone.

 

Ha - good call.  As someone getting out of the military shortly, the specificity of experience spelled out in most job postings is concerning.  I imagine that talent + initiative will eventually persevere, though.  I plan to pull a Hank Greenberg and storm into a boardroom or two.

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I've always thought hedge fund job job postings where pretty funny sometimes.  You'll see analyst positions with a requirement that you generate your own successful investment ideas.  If I could pull successful investment ideas out of a hat, why would I want to be your analyst? You become an analyst to move up the ladder in hopes that one day you can LEARN to generate your own investment ideas.

 

As a former recruiter who worked for 5 years with hedge funds hiring junior analysts, it's not always about your specific idea or your proven ability to generate successful ideas. The guy interviewing you wants to see how you think and how you dig into something deep to come up with a new angle that hasn't been considered by anybody else. They want to see if your thought process is compatible with the fund's or their own style. They want to see how deep you are willing to dive down into a single idea, or will you just read the latest 10-Q and throw together a DCF model. If you are asked to provide some ideas in the interview or to do a sample report, it's not about your recommendation to buy or sell, but rather the quality of your analysis and how you went about your research.

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Ha - good call.  As someone getting out of the military shortly, the specificity of experience spelled out in most job postings is concerning.  I imagine that talent + initiative will eventually persevere, though.  I plan to pull a Hank Greenberg and storm into a boardroom or two.

 

You will probably do well with a more direct approach. Bring some ideas and an understanding of what you can bring to the table. Then just make as many approaches as you can, all the while trying to bring value to the table. It's not about getting a job but providing the other person with more value than you are taking away. For a hedge fund PM, this could be some good ideas that would fit their investment style, or just new angles/information on positions or ideas under consideration.  I've met several hedge fund founders (later running billions of AUM) who got their first break through offering to work for free, just to prove themselves. They were hired because they offered more value than they were taking and got a chance to prove it.

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Ha - good call.  As someone getting out of the military shortly, the specificity of experience spelled out in most job postings is concerning.  I imagine that talent + initiative will eventually persevere, though.  I plan to pull a Hank Greenberg and storm into a boardroom or two.

 

You will probably do well with a more direct approach. Bring some ideas and an understanding of what you can bring to the table. Then just make as many approaches as you can, all the while trying to bring value to the table. It's not about getting a job but providing the other person with more value than you are taking away. For a hedge fund PM, this could be some good ideas that would fit their investment style, or just new angles/information on positions or ideas under consideration.  I've met several hedge fund founders (later running billions of AUM) who got their first break through offering to work for free, just to prove themselves. They were hired because they offered more value than they were taking and got a chance to prove it.

 

Thank you for the thoughts! I plan to.

 

For the record, I was joking about the boardroom storming - I remember reading that anecdote about Greenberg and found it amusing.

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Joined a family business. As a recruiter I was in Tokyo and covered Asia. It was great when times were awesome, but got tougher financially and mentally during the crisis and as Japan continued to wither away. Glad to have moved on as it wasn't a perfect fit for me but it was extremely interesting for a while.

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