Question on type of Equity Fund

Quick question:

What would constitute a 'special situations equity fund'???

I only know of special situations funds from the distressed credit side like Sankaty.

A special situations equity hedge fund sounds more like PE

7 Comments
 

It's almost a trick quesiton to even try to answer this because the definition can vary so widely depending on who is saying it. But a good guess might be an equity fund that focuses on things like spin outs, carve outs, liability situations, distressed equity, and possibly even merger arb as a "special situation." Broadly speaking, these would be event driven / uncommon situations that are not strictly based on fundamental data and "typical" investing strategies (value investing, buy low, sell high, whatever).

One example might be a fund that actively seeks equities that are engaged in asbestos liability claims and tries to handicap the maximum claims value, then overlays that on the current price to see if the companies are a buy or not. Most investors would just assume the stocks in question are toxic waste and wouldn't even try, but that's not always the case.

Another one might be a company that had an extremely negative outcome that most people think is going to go bankrupt. Early in my career I evaluated a pharma manufacturing company that had an FDA-forced shut down of its main facility. They couldn't produce revenue, yet couldn't cut fixed costs all the way either because they would need their labor once the factory re-opened. The Street thought it was a zero and the stock got down well under a dollar. We looked at the probability of the timing of a re-opening of the factory based on precedent, FDA behavior patterns, etc. and overlaid an estimate of the company's financials onto that analysis and thought it was about a 50 / 50 shot. We took a small position on the shot, and the stock went up nearly 20x after the facility was opened (i.e., the probability adjusted valuation was extremely favorable so a small bet was a reasonable call even if it might ultimately be a zero). Most investors wouldn't even look at that kind of scenario, so I'd call that a special situation.

I would also say rights offerings and warrant situations are also special situations -- that's something the fund I work for participates in heavily.

 
RavenousIt's almost a trick quesiton to even try to answer this because the definition can vary so widely depending on who is saying it. But a good guess might be an equity fund that focuses on things like spin outs, carve outs, liability situations, distressed equity, and possibly even merger arb as a "special situation." Broadly speaking, these would be event driven / uncommon situations that are not strictly based on fundamental data and "typical" investing strategies (value investing, buy low, sell high, whatever).

One example might be a fund that actively seeks equities that are engaged in asbestos liability claims and tries to handicap the maximum claims value, then overlays that on the current price to see if the companies are a buy or not. Most investors would just assume the stocks in question are toxic waste and wouldn't even try, but that's not always the case.

Another one might be a company that had an extremely negative outcome that most people think is going to go bankrupt. Early in my career I evaluated a pharma manufacturing company that had an FDA-forced shut down of its main facility. They couldn't produce revenue, yet couldn't cut fixed costs all the way either because they would need their labor once the factory re-opened. The Street thought it was a zero and the stock got down well under a dollar. We looked at the probability of the timing of a re-opening of the factory based on precedent, FDA behavior patterns, etc. and overlaid an estimate of the company's financials onto that analysis and thought it was about a 50 / 50 shot. We took a small position on the shot, and the stock went up nearly 20x after the facility was opened (i.e., the probability adjusted valuation was extremely favorable so a small bet was a reasonable call even if it might ultimately be a zero). Most investors wouldn't even look at that kind of scenario, so I'd call that a special situation.

I would also say rights offerings and warrant situations are also special situations -- that's something the fund I work for participates in heavily.

Hi Ravenous,

Could you talk about your path to working for your fund? Were you a salesman or trader at a bank first?

 
Best Response
TraderDaily

Hi Ravenous,

Could you talk about your path to working for your fund? Were you a salesman or trader at a bank first?

No, I have never worked at a bank. I started my career in MM equity research coming out of a non-target. I passed the CFA 3/3 and moved to a top hedge fund as a generalist, more by mistake than by any brilliant strategy. I was checking job boards regularly and an obscure job posting came up that sounded interesting, so I lobbed a resume in less than 30 minutes after it went up and was invited to interview the next day. There was a good fit, so the firm made me an offer. I've been here ~3.5 years and have run the gamut from ridiculous road trips, to private equity bids, to starting and running an international office. I've been fortunate enough to learn from the best and to be able to actually apply the discipline and have had some very good calls along the way. It's kind of a cinderella story (not to mention the fact that I busted my ass off 7 days a week for the first 5 years in the business).

 

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