Sold all Soho China @ HKD2.21. I sold all the shares because I was clearly wrong about the deal and that I would not have bought the shares at the current price even if I don’t have a position to start with.
The cost basis of this position is around HKD 4.3 which means a painful 50% loss!
A couple of lessons learnt:
- This is my first unsuccessful special situation investment in the last 5 years. Despite the high probability of success, each failure carries a huge loss in the event of failure. As such, despite my four other merger arb successes this year, this one loss is enough to negate all those profits. This is a good reminder that merger arbs are fundamentally not the best investment opportunities since they have small upside and huge downside. So it is a game of not making mistakes and keeping the success rate high. It is another reminder that I should keep the average special situation position small to let diversification do its magic and achieve a reasonable average return
- Clearly, I made a mistake by not paying as much attention to the “political” risk of the founder and instead focus too much on the business logic of the deal. In hindsight, if I had done more work on the founder, then I would have concluded that the situation was not analysable and hence belongs in the too-hard pile
- Going forward, I will be much more careful when dealing with private enterprises in China
I will continue to invest in merger arbs if I am capable of assessing the odds and the return satisfactory.