The Journal of Alternative Investments

Five Examples of Direct Value Creation and Capture in the Pension Fund Industry

Sebastien Betermier — 2025-01-14

How can pension funds create and capture value in financial markets? We study four landmark transactions made by large Canadian pension funds: OTPP’s acquisition of Cadillac Fairview, PSP’s development of Mahi Pono, CDPQ’s development of Réseau Express Métropolitain, and CPP Investments’s acquisition of Antares Capital. The funds create and capture value by achieving scale in strategic markets, reducing fee drag, coordinating stakeholder groups, and developing internal synergies. We identify the primary risks, discuss the risk mitigation strategies implemented by the funds, and then study how UPP, a smaller pension fund, emulates some of these strategies on a smaller scale.

Inter or Intra? An Analysis of Pairs Trading in Futures Contracts

Raymond C. W. Leung — 2025-01-14

We show the return performance of long-short inter-commodity trades is substantially higher than that of intra-commodity trades in a statistical arbitrage pairs trading strategy. Two futures contracts form an intra-commodity pair if they hold the same underlying commodity but have different expiration dates, and they form an inter commodity pair if the two under-lying contracts are for different commodities. The outperformance result holds true in most major futures markets, and also when we consider cross-sector aggregations of these markets. We find the amount of mispricing opportunities in the Energy (Grains & Softs) futures market is the highest (lowest). Overall, and using the parlance in the oil & gas industry, our results suggest statistical arbitrage mispricing opportunities are more likely found in “crack-spread” trades than in “calendar-spread” trades.

Single-Name and Index CDS Dynamics during the Market Stress of 2020

John Coughlan — 2025-01-14

Using CFTC's regulatory data that includes identities of all market participants, we study the dynamics of single-name and index credit default swaps (CDS) leading up to, during, and in the aftermath of the COVID-related financial markets turmoil of 2020. The paper reports volume and directionality of trades and positions of major market participants detailed by product and firm type. Among the findings of the paper are five key stylized facts. First, gross notional in the standard CDS indices nearly doubled by mid-March 2020, while non-standard indices and single-name CDS remained largely at the pre-COVID levels. Second, hedge funds and asset managers were the most active client sectors in absolute terms; insurance companies and pension funds showed significant relative movements. Third, CDS volume traded during the COVID period increased more in relative terms than the volume of either interest rate swaps or currency swaps. Fourth, US and European investment-grade indices were the most heavily traded indices during the market stress of 2020, while high-yield indices accounted for a much smaller share of market activity. Fifth, swap dealers more than doubled their standard index positions in March 2020, and this movement accounted for more than 85% of the total increase in positions across all market participants.

The Dichotomy of Networking and Syndication: Evidence from US

Ankur Mehra — 2025-01-14

Syndication and networking are two common phenomena among Venture Capital firms. While the focus of VC firm syndicating most deals is on diversification of the financial risk, the focus of a VC firm establishing a network through syndicated deals is on getting access to expertise, deal flow and contacts of its peers. In this paper, we ask if establishing relationships is more important than diversification of financial risk for young VC firms. We study US-based young VC firms during their first five years of operations and its impact on their long-term success and survivability. We conclude that for a young VC firm, diversification of financial risk pays off in the short run only, such VC firms have a lower chance of surviving and are less successful. However, those young VC firms which are focused on establishing a relationship network not only perform better in the short-term but also survive longer and are more successful in the long-run.

Linking Climate Risk to Credit Risk: Evidence from Sectorial Analysis

Mohamad H. Shahrour — 2025-01-14

This paper addresses the pressing issue of the impact of climate change on credit risk. We take a novel approach by examining a company's emission category score, which measures its effectiveness in reducing environmental emissions during production and operational processes. The study acknowledges that the effects of climate risk on credit risk may vary across industries, and thus, conducts a comprehensive sectoral analysis to better understand the industry-specific effects of climate risk. The overall findings indicate in negative relationship between firms’ carbon emissions score and credit risk. However, we document a positive relationship in the Industrials sector. We emphasize the importance of firm in taking climate risk seriously and incorporating it into their risk management strategies. The findings have significant implications for portfolio managers, socially responsible investors, and policymakers, offering valuable insights for the construction of more resilient and sustainable financial portfolios and systems, all the while mitigating exposure to climate-related risks.

Acquisitions of venture-capital-backed companies: A trend toward convergence of financial and strategic acquirers?

Fabian Hogrebe — 2025-01-14

Acquisitions are the most frequent venture-capital exits in the United States. In 2019, one-fifth of venture-capital exits in the United States were reportedly financial acquisitions. Despite the increasing practical relevance, examining acquisitions as a venture-capital exit channel has long neglected financial acquirers. Using a sample of 6,348 acquisitions of venture-capital-backed companies in the United States between 2005 and 2021, this study analyzes relationships among the company, the investor, and market characteristics and the exit via an acquisition by either a strategic or a financial acquirer. The study provides empirical evidence for the convergence of financial and strategic acquirers, due to a change in private equity firms' investment strategy and behavior. The results indicate a shift from opportunity-seeking in earlier years toward industry specialization in recent years, to compete with and partially outbid corporate acquirers in acquisitions of top-tier venture-capital-backed companies.