New product provides downside protection

New product provides downside protection

New product provides downside protection With experts on both sides of the argument when it comes to the valuation of stocks, a product used extensively in the U.S. has made its way to Canada and advisors might want to take note.

“I define a bubble as a social epidemic that involves extravagant expectations for the future. Today, there is certainly a social and psychological phenomenon of people observing past price increases and thinking that they might keep going,” Nobel Laureate Robert Shiller told Goldman Sachs senior strategist Allison Nathan in a PBR interview. “So there is a bubble element to what we see.”

For those advisors who agree with the Yale professor that equities have gotten a little overheated and might like to park some cash, you might want to consider Dundee Acquisition Ltd., a special purpose acquisition corporation that started trading on the TSX at the beginning of June.

Sponsored by Dundee Corporation, the newly minted SPAC raised $100 million in its recent IPO to use towards acquiring a middle-market company with an enterprise value between $200 million and $800 million.

SPACs became popular with hedge fund managers during the market correction of 2008 because money could be parked in these investment vehicles providing impressive yields on that cash while also protecting on the downside because the funds raised by the SPACs were escrowed until a deal was found.

"The SPAC common are really the best risk-adjusted investment I've ever seen in my career," said Neil Danics in an April 2009 article in "You're basically buying the same short-term Treasury that yields zero, but you're buying it at 7% with greater upside if a good deal is announced."

While the same yield opportunity doesn’t currently exist for Dundee’s SPAC, should stocks experience a correction over the next 24 months (the life of the SPAC), advisors not only have a good place to park client funds but also to benefit on the upside when an operating company is ultimately acquired by Dundee.

Everything old is new again.