By now, we all have heard of Bernie Madoff and how he defrauded investors of potentially billions of dollars. As dispicable a person as he is, Jim Altucher writes in the Financial Times that Madoff did have some very good stocks in the the remaining $300 million of his fund:
It looks like Mr Madoff (or whoever chose the stocks in his fund) liked to get involved in various special arbitrage situations. Some of these still exist and make for interesting stock picks.
For instance, it looks as though Mr Madoff played a lot of special-purpose acquisition company arbitrage: SPACs trading below cash. I like Madoff’s largest position, Hicks Acquisition . It went public, raised cash and is now looking for a business to buy. If it does not buy a business, or shareholders reject the deal, the cash raised is returned to shareholders. Hicks has $540m in cash and a market capitalisation of $480m. Trading below cash makes this a very safe play.
Mr Madoff also liked merger arbitrage: his second largest position at the end of September was Anheuser-Busch, which has since been acquired. When Mr Madoff bought the stock he had a potential 40 per cent annualised return implicit in it because of the arbitrage going on with Anheuser-Busch being acquired by InBev. The deal closed in November so Mr Madoff made his money.
It looks as though Mr Madoff also liked “closed end fund arbitrage”: buying closed end funds trading at significant discounts to their net asset value. For instance, he liked Eaton Vance Senior Income Trust and several closed end funds that were trading at 20-30 per cent discounts to their net asset values.
Yes, these stocks strike me as classic arbitrage situations in which old school value investors like Graham and Schloss would have engaged. Other, present day value investors have no doubt purchased these stocks as well. Seth Klarman has had many small positions in SPACs, like Hicks Acquisition, over the past year or so. Investors like Phil Goldstein and Arthur Lipson have specialized in investing in closed end funds that are trading at steep discounts to their net asset values.
These are good and profitable investing strategies if you know what you are doing. It’s extremely unfortunate that Madoff used his considerable talents to defraud his clients rather to help them.
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