SPAC Arbitrage

SPAC arbitrage is the dominant trading strategy in the pre-deal SPAC market. Specialized hedge funds and quantitative strategies buy SPAC shares trading at or slightly below the per-share trust value, hold them through the next shareholder vote (business combination or extension), and redeem for the trust value — capturing the spread between purchase price and redemption price, plus any trust interest accrued during the holding period.

The strategy is considered near-riskless because the redemption right provides a hard floor on the investment. Regardless of what happens with the proposed deal — whether it's attractive, mediocre, or fails entirely — the arb fund can redeem at NAV and recover its capital plus interest. The primary risks are opportunity cost (capital is locked up for an uncertain period), the rare scenario of SPAC fraud or trust mismanagement, and the short-term mark-to-market risk of shares trading below trust.

Annualized returns from SPAC arbitrage depend on the spread at entry, the holding period, and the prevailing T-bill rate (which determines trust accrual). In a high-rate environment with SPACs trading near trust, annualized returns of 5–8% are common — competitive with short-term fixed income but with similar risk characteristics.

The dominance of arbitrage capital in the SPAC market has profound structural implications. It means that most SPAC shareholders have no interest in the target company and will redeem regardless of deal quality. This drives the high redemption rates that have become the defining feature of the SPAC market since 2022, and has forced sponsors to adopt non-redemption agreements, backstops, and other mechanisms to ensure enough cash survives to close deals.