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My ARA Asset Management fixed deposit adventure.

Friday, February 10, 2017

When I shared my full year results end of last year, I mentioned ARA Asset Management's offer of $1.78 a share and how it translates to 35% to 78% capital gains for me if the offer is to be accepted.

At the time, I had a fixed deposit maturing and ARA Asset Management's share price was at $1.71. So, I decided to plonk the money from the fixed deposit into their stock. 

It looked like it would be a sure win, an arbitrage opportunity, and I would get a 4% "interest rate" so to speak within half a year or so.

At the time, I knew some shareholders thought $1.78 was too low a price and I knew there was a possibility that the offer would not be accepted. No issues, I thought. I could keep the investment and receive 5c dividend year after year which would give me a yield of around 3%

However, at the back of my mind, there was a very small voice which asked if I really want a much larger position in ARA Asset Management and with a yield of only 3% to boot in case the offer is rejected by shareholders?

That voice did not go away

Today, I decided to accept a yield of about 2.6% from Mr. Market. After costs, it would be a bit lesser. I closed my "ARA fixed deposit" and received what is very good "interest income" for a 2 months fixed deposit.

I thought of this position as a "fixed deposit". So, like a fixed deposit it should behave.

I still retain my original investment in ARA Asset Management. What I divested was my more recent "investment".

Related post:
2016 FY passive income non-REITs (Part 2).


redponza said...

This is a wrong way to do risk arbitrage....
You should at least estimate the chance of the deal getting rejected and the subsequent loss vs the chance of the deal passed and the gain....

AK71 said...

Hi redponza,

So cheem. Would you like to comment on how such an estimate could have been done?

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