Double Blind

I have been looking at certain types of investments for my RSP since I have some US cash that I would like to deploy.  Typically I perform some common stock screens and then do some valuations on companies that initially appear to be attractive, but I accidentially ran across some alternative asset types that trade on the main exchanges (Nasdaq, NYSE).

They were trading at valuations which were giving yields that seemed a bit excessively high (e.g. in the low double digit range), so I did some further digging and discovered these classes of assets were asset-backed securities.

These were the classes of securities that got a very bad reputation as being “junk” as they were backed with mortgage-based products.  However, there are classes of asset-backed securities that are backed with legitimate assets.

A lot of these securities have been trading at significant discounts to their underlying assets, which creates an arbitrage opportunity – the reason why this gap has not been closed is that trading on the asset-backed securities is very light and it is generally not worth it for high-volume institutions to take dollars when they’re going for millions.

Anyhow, I am watching these very closely since after doing all the research I’m fairly convinced that some relatively less risky double digit returns can be realized with some of these.  Unfortunately, I can’t be more specific since the liquidity of these products are horrible (e.g. $30,000/day traded with 3% bid/ask spreads is typical), but when I’ve executed some trades I’ll divulge some more information.

This entry was posted on Friday, August 15th, 2008 and is filed under Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.