ECM trades at hedge funds, how do they make $$?
Hi there!
Anyone currently works in hedge funds ECM team that focuses on investing in ECM trades (ie IPO, block trades, private placement)?
I recently met with some guys from an active deal player hedge fund that literally invests in most if not all ECM trades focusing on the Asia region.
Just wondering how they manage to generate consistent returns through ECM trades given they invest in most if not all deals (as I understand) and obviously not every deal can be a good deal.
So just wondering how ECM trades investment process is like in hedge funds? And how different this investment process is vs non ECM trades at hedge funds?
Obviously for example for a block trade hedge funds can buy at a discount which give them some comfort and competitive advantage / margin of safety vs other secondary market players who don’t have access to these trades and can only buy in secondary markets.
But this still doesn’t explain why a hedge fund would invest in all ecm deals. Unless they have some secret sauce / hedging / other skills that make them “market neutral” and be able to make money from literally every ECM trade.
Would really appreciate if anyone who focuses on ECM trades at hedge funds to shed some light on this
You've got to lose some to win others. So it is a matter of losing less when you do and betting big on winning trades.
The average offer / 1-day of US of all ipos was ~25%.
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Did this in a HF.
There are different ways of approaching this strategy. But in general every deal is a good deal by nature.
The price is set up by the buyers, not the seller. The buyers thererore buy only at a price that they consider good enough.As always in finance there is a price for everything, so buyers ask for a discount that reflects the specifics of the deal. I have seen deals at 10/15% discount versus last closing price, is it a good or a bad deal? I have seen deals at 0% discount, is it a good or a bad deal ?
Of course depending on your strategy and risk profile some deals can be more appropriate or not.
Last thing this is a strategy that is limited in capacity, so some big HF do not consider it, probably letting more room for smaller HF and LO on this one.
Happy to discuss any specifics more in details
Good insights!
Can you share more details on how you come up with the right price for a block trade, for example what parameters you look at and how you arrive at the price you want to invest in? And how do you hedge this trade?
You also mentioned “ECM strategy” might be more for smaller hedge funds. Can you explain on this please? Is it because naturally the total investment size available in ECM deals are quite small anyways (say combined deal size of all ECM deals accessible by one hedge fund in a year which can be small vs the total investable equity secondary market)?
And how ECM trade team work with L/S team at hedge fund (if they do). How L/S strategy is different from ECM strategy in terms of say parameters they look at, ways they trade the stocks etc.
Thats some really good insights. Thanks for sharing
Some parameters are:
Primary vs secondary offering
If primary: why the company needs money, and how is it going to be used
If secondary : who is/are the shareholder(s) that want to sell and why
Size relative to market cap or liquidity
Was the deal expected
No special hedging method
Regarding capacity : yes this is it.
In a SM shop there is often collaboration with the other people if one knows the stock. If no one knows the stock already you are alone. Don't know how this work in MM. The bankz managing the deal often have an analyst covering the stock and he can give you some info about the company.
There is not one way of doing this. The exact approach and methodology will depend on the team/fund investment style.
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