Sources of Inefficiency/Mispricings? What causes forced selling?

Saw an interesting thread titled "How Do You Nail The 'Wow Factor' In A Pitch?", and it prompted a few Qs. I'm an RX guy, and really the main thing that come to mind when I think of inefficiency in public mkts is forced/uneconomic selling. Could be from driven by Ch 11 emergence, SpinCo stuff, or maybe index additions/deletions & subsequent actions from ETFs. What are some other things that cause mispricings?

Any sector specific (TMT, energy, consumer etc) events that cause uneconomic selling? Would love to hear some money making plays/stories from prior years if anyone has. Archegos gave rise to some interesting opps in Viacom & Discovery, but does anyone have any current ideas outside of the archegos complex?

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Comments (6)

May 3, 2021 - 6:06pm

Maybe in tech the rising prices of crypto may be causing selling of crypto assets as people need to rebalance portfolios to account for the rising dollar value of the crypto assets which may be too high of a percentage of their total portfolio based on their target allocation to crypto 

  • Associate 1 in IB - Gen
May 4, 2021 - 4:38pm

Buy cuspy TLAs and RCF from banks ahead of stress testing to get their RWA down (this could be dated as the last time I was intimately involved in Risk weightings and stress tests at banks was 2+ regulatory regimes ago)

bonds that are on the cusp of downgrade or upgrade to non-investment grade / investment grade. Investment funds LPAs may mandate that they only hold a max of x% of their portfolio one or the other, which could trigger forced selling.

A similar one is with dividend stocks. Last march, a bunch of hotel and office REITs suspended dividends and all of these dividend funds that weren't allowed to hold non-dividend paying stocks panic sold. I bought up a ton of these. Some of these stocks were trading at 40%+ of implied normalized dividend yield

Overall I think the best ones are changes that make investments that might be widely held by certain institutions no longer permissible under those institutions operating agreements--ratings changes, conglomerates discontinuing operations in or spinning off divisions in noncore industries could result in industry specific funds being forced to sell (While GE Capital still exists, I'd hardly consider it a financial institution. Financial services focused funds may be forced to sell GE)

One trade idea that I did a little bit of research on but didn't ultimately dive deep in due to logistical issues was a few months ago when there was a lot of talk about certain Chinese companies being banned from US exchanges / banning US investment in those stocks, my thesis was to call bull shit on that and buy up some of the stocks that didn't have much real exposure to the Chinese government or military. I kind of hit a wall when I realized the best way to do this would be to trade the stocks Chinese stock exchanges

  • Associate 1 in PE - LBOs
May 4, 2021 - 6:32pm

You should take a look at this: http://www.distressed-debt-investing.com/2012/01/where-to-look-for-idea…

Shows a list of forced selling situations for equity & credit (that site as a whole is golden btw). Under the equity section, there's the following events:

1. Merger Arbitrage

2. Index additions and deletions

3. Tax loss harvesting causes irrational selling in the 4th quarter (see Mike Burry)

4. New lows cause irrational selling

5. Spin offs selling effect

6 Dual class A/B arbitrages

7. SPAC investing (warrants, arbitrage)

8. Closed End Fund Discounts

9. Super micro-cap / illiquid stocks
10. Thrift conversions
11. Busted MLPs

Can anyone explain how forced selling comes into play in 1, 6, 7, 8, 9, 10, and 11? Much appreciated!!

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