SPAC Arbitrage Strategy

The thesis

A Special Purpose Acquisition Company (SPAC) raises cash from public investors at IPO and parks it in a trust account, typically at $10.00 per share, while it searches for a private company to acquire. Pre-deal, every SPAC share carries a contractual right: holders can redeem at trust value (initial $10 plus accrued Treasury interest) when the SPAC’s sponsor proposes a merger. That redemption right is what makes pre-deal SPACs functionally equivalent to a short-duration Treasury position with a free call option on whatever deal eventually gets proposed.

When a SPAC trades below its estimated trust value, the discount is pure free money — assuming the trust is honored, which historically it almost always is. Even when the eventual deal is a disaster (most are), holders who redeem before the vote get their pro-rata trust amount back. The SPAC arbitrage trade is buying the discount and either redeeming for cash (capturing the carry) or holding through the vote for upside on the deal optionality.

Academic basis

Klausner, Ohlrogge, and Ruan’s 2022 Yale Journal on Regulation paper documented the structural costs that SPAC sponsors impose on post-merger holders — founder share dilution, warrant overhangs, sponsor fees — which together cause the average post-deSPAC share to drop substantially relative to its initial $10 trust value. Critically, these costs apply to holders who do not redeem; arbitrageurs who hold pre-vote and redeem capture the discount without exposure to dilution.

Gahng, Ritter, and Zhang (2023) computed the returns separately for SPAC IPO investors who held to the deSPAC and those who redeemed at the vote. The redemption-arbitrage strategy earned positive risk-adjusted returns in nearly all years studied, while buy-and-hold post-deSPAC investors lost meaningfully. The implication: there is real money in the pre-vote arbitrage; the “losses” in SPACs accrue to non-redeeming holders.

The discount exists because SPAC arbitrage requires patience (capital is tied up until the vote, often 18–24 months) and tolerance for low absolute returns (Treasury yield plus a small carry). Institutional arbitrage capital flows in and out depending on yield curve levels — when short rates rise, SPAC arb becomes more attractive and discounts compress.

How Alpha Suite implements it

• SPAC name-pattern detection — tickers whose yfinance shortName contains “Acquisition Corp”, “Acquisition Holdings”, “Capital Corp” with a numeric suffix, or “SPAC” are flagged as candidates. False positives are filtered economically (must trade near $10 with low volatility).
• Trust value estimation — without a paid SPAC data feed, trust value is estimated as $10.10 plus monthly Treasury accrual since IPO. Treasury proxy: short-rate from the SHV ETF yield, with a 5% fallback if the proxy fetch fails.
• Discount filter — only SPACs trading below estimated trust value qualify. Minimum 0.5% discount required to flag.
• Pre-deal filter — SPACs trading meaningfully above $10.30 are skipped (a deal has likely been announced; the trade is no longer arbitrage but speculation on the deal).
• Distress filter — SPACs trading below $9.50 are skipped (something is wrong: possible delisting, deadline crisis, or trust-value haircut).
• Annualized-yield scoring — discount of 1%+ gets +5; 2%+ gets +10; annualized yield above 5% gets an additional +5.
• Deadline window — deadlines under 90 days get +5 (faster carry capture); deadlines over 365 days get -10 (long capital lockup, extension risk).
• Take-profit at trust; stop at -3% — even “broken” SPACs rarely break trust value materially, so the stop-loss is tight. The take-profit is mechanical (estimated trust at deadline).
• Long-only — this is the only practical leg of the trade for the suite’s paper-tracking infrastructure.

When it fires

Pre-deal SPACs trading at small discounts to trust appear most often when (a) short rates have risen and pulled trust accrual rates above the SPAC’s implied yield, (b) sponsor reputations are weak, or (c) the SPAC is approaching deadline without an announced deal. The cleanest fires combine all three: a SPAC with a deadline 60–180 days out, no announced deal, trading 1–3% below the rolled-forward trust value.

The strategy does not fire when SPACs are trading at premiums (post-deal speculative phase) or when the broader SPAC market is hot and discounts have compressed below the strategy’s minimum threshold. In those regimes, the engine simply produces no signals — preferable to inventing trades.