June 19, 2008

Closing CHC position

I have sold my CHC shares today at $31.95 on the news that the buyout will be delayed. I am leaving on the table $.73 or 2.4% on my original purchase price. The investment generated 5.5% (including a dividend payment).

It is time to move on from this investment as the uncertainty in a special situation like this does not warrant the extra return. I have no doubt that the transaction will close eventually but the delay can ruin your rate of return.

The relative performance of the buyout outperformed the S&P but failed to outperform the TSX. The TSX returned 9.25% while the S&P lost 3% over the same period. I think the better benchmark for CHC is the TSX as it was a Canadian company but to make myself feel better and look good for the reader I will claim that I have outperformed the S&P.

Although on annualized basis buyout investing or risk arbitrage can yield north of the 20% p.a., I do not pursue it aggressively. I am opportunistic with this strategy. I will only invest in situations where I know the players involved and I can buy risk in face of uncertainty. Also, I try to avoid complicated deals that have a lot of moving parts. This buyout was simple and all cash offer, easy to understand and value.

I do believe that risk arbitrage is no place for a retail investor. There are multiple ways where a buyout can fail and results can be disastrous.

In the CHC situation, I had a good knowledge of First Reserve and their track record and investment strategies. However the market was preoccupied about uncertainties of deal financing and I took that bet. Fortunately things worked out. It is time to redeploy capital to work on other opportunities.

No comments: