Thanks very much Kevin, that is very interesting.
I notice in the chart a few things.
139.142.147.218
First, a huge volume spike at the beginning of 2001 (roughly 10 times normal volume for the week), then a surge of volume in May and June 2002, culminating in a gap down that triggered selling down to the reversal at the beginning of 2003. It would seem that second volume surge and gap down was the HF closing out their positions.
Looking at the volatility in price during that time compared to the rather methodical, orderly uptrend after the dust had cleared and the bottom formed in January 2003, I can see why they wanted to rid themselves of the HF!!
A very interesting strategy.... even though they might have lost or broken even on the long end, closing the premium and covering the short netted them quite a nice profit just the same.
I don't know for sure, but I suspect this strategy more typically triggers a nice rally in the CEF to close the gap. If so, it strikes me that one could develop a "ride the coattails" sort of strategy.
It might be more work than its worth, but one could make a list of potential arbirtrage targets based on the premium/discout... the wider the spread, the more obvious the target. Then, wait for a big volume surge, and take a long position in the CEF. To make sure, you could check the short interest in the major holdings. If there's unusual short or put activity, that would be the tipoff. You could verify that by checking the major shareholders, and looking for a new HF that wasn't there previously.
What do you think?
T |
