A dual-class arbitrage in Berkshire stock?
Hat tip to Ray for pointing this out to me. A few days ago BRK.B was trading at a level significantly lower than 1/30 of BRK.A. In fact the spread represented 7% of the value of BRK.B.
This was a decent arbitrage opportunity, as the two BRK classes have historically been pretty good about reverting to parity fairly quickly. Indeed, within two days the spread has already narrowed to less than 2% (as a % of BRK.B). Below is a chart of the difference over the last year.
It is interesting to see how the spread became more erratic as market volatility increased in the fall. Note that the spread rarely dips into the negative. This is by construction, since BRK.A is convertible in to BRK.B but not vice versa. This means that a mispricing favoring the B shares could immediately be corrected by arbitrageurs converting their A shares to B. But the opposite cannot be done, leaving the arbitrageur at the mercy of the market to correct the mispricing.
In the rare cases when the spread does bounce up to the 7% range, this makes for an opportunity for a quick profit for those vigilant enough and quick-fingered enough. The recent bounce lasted at least 24 hours from what I could tell, which is plenty of time to implement the trade.
A few other notes: BRK is a great stock to play the dual-class arbitrage with because it is so liquid and small investors should have no trouble finding A shares available for short. Of course, you need at least $78,000 in capital so I guess the really small investor is out of luck.
Moreover, the differential in voting rights between the A shares and B shares is inconsequential in the case of Berkshire since Buffett et al. control the voting power of the company anyhow. Thus we can expect the 1:30 ratio to hold irrespective of the differential voting rights of the two shares.
I suppose measuring the spread as a % of BRK.A would be more appropriate, because a true arbitrage strategy would short BRK.A and long BRK.B, holding until the difference was zero.
This was a decent arbitrage opportunity, as the two BRK classes have historically been pretty good about reverting to parity fairly quickly. Indeed, within two days the spread has already narrowed to less than 2% (as a % of BRK.B). Below is a chart of the difference over the last year.
It is interesting to see how the spread became more erratic as market volatility increased in the fall. Note that the spread rarely dips into the negative. This is by construction, since BRK.A is convertible in to BRK.B but not vice versa. This means that a mispricing favoring the B shares could immediately be corrected by arbitrageurs converting their A shares to B. But the opposite cannot be done, leaving the arbitrageur at the mercy of the market to correct the mispricing.
In the rare cases when the spread does bounce up to the 7% range, this makes for an opportunity for a quick profit for those vigilant enough and quick-fingered enough. The recent bounce lasted at least 24 hours from what I could tell, which is plenty of time to implement the trade.
A few other notes: BRK is a great stock to play the dual-class arbitrage with because it is so liquid and small investors should have no trouble finding A shares available for short. Of course, you need at least $78,000 in capital so I guess the really small investor is out of luck.
Moreover, the differential in voting rights between the A shares and B shares is inconsequential in the case of Berkshire since Buffett et al. control the voting power of the company anyhow. Thus we can expect the 1:30 ratio to hold irrespective of the differential voting rights of the two shares.
I suppose measuring the spread as a % of BRK.A would be more appropriate, because a true arbitrage strategy would short BRK.A and long BRK.B, holding until the difference was zero.
posted by Andy Kern at
12:56 PM
1 Comments:
With the Gates Foundation selling B shares annually, I think the spread between the two classes of stock will slowly widen. I agree the spike to 7% in February was over done. There may be short term opportunities, but if the spread doesn't narrow quickly, I wouldn't wait around for it to magically narrow.
Longer term, the spread will continue to move wider based on the extra supply of B-shares. Since there is no way to create A shares, the spread can only narrow naturally if big investors decide they want to add to their BRK position and make the decision to buy the cheaper B shares. The bigger deciding factor for large investors will be which share class has more liquidity.
By
Derek Pilecki, at 17 May, 2009 04:33
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