SPAC Arbitrage

A special purpose acquisition company raises money in an IPO, puts nearly all of it into a trust account earning interest, and has a fixed window — usually two years — to find a private company to merge with. Here's the part that makes it a different animal from a normal stock: at any point before the merger closes, a shareholder can redeem their shares for their pro-rata share of the trust, roughly the original $10 IPO price plus accrued interest, regardless of what the merger target turns out to be. That redemption right is what SPAC arbitrage is built on.

The trade

Buy SPAC shares in the open market when they trade below the per-share trust value — this happens often, since many holders sell rather than deal with the redemption paperwork, or need liquidity before the deal closes. Hold until either a merger is announced and you decide the target is attractive enough to keep the stock, or you exercise the redemption right and get the trust value back in cash. Either way, buying at a discount to trust value locks in a return with very little downside, because the redemption floor doesn't depend on the deal happening at all.

Worked example

A SPAC IPO'd at $10.00/share, and the trust has since accrued interest to $10.35/share. The stock trades at $9.85 in the open market, six months before the redemption deadline.

1. Discount to trust. $10.35 - 9.85 = 0.50$, i.e. buying at a $0.50 discount to the guaranteed floor.
2. Minimum return if simply redeemed. $0.50 / 9.85 \approx 5.1\%$ over six months, with the redemption right doing all the work — no merger required.
3. Upside scenario. If a merger is announced that the market likes, the stock could trade to $12 or higher; the investor keeps that upside for free, since the $9.85 entry price was already covered by the redemption floor.

The position isn't riskless — trust accounts have occasionally been mismanaged or delayed, and a shareholder vote could in rare cases restrict redemption terms — but the structure gives a return floor most equity trades don't have.

What this means in practice

The trade has gotten more crowded and the discounts thinner as more funds specialize in it, but it remains a reliable way to earn a small, low-volatility yield while a SPAC searches for a deal. The real skill is in redemption mechanics and deadlines — knowing exactly when and how to exercise the right — more than in evaluating whatever business the SPAC eventually proposes to merge with.