What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing today we're doing a video about sophisticated strategy used by hedge funds to generate significant market beating returns. Keep in mind that we are not financial advisors and this video is, for entertainment purposes, only make sure to do your own research and consult with a professional before making any investment decision we're talking today about shared class arbitrage. If you invest in technology stocks, you may have noticed that google's parent company alphabet has two different: ticker symbols: gog and gogl. They are almost identical, except that gog is about one percent more expensive than g-o-o-g-l.

Both shares have identical ownership rights to google, to the extent that they ever pay any dividends in the future. Both shares will receive the same payout. The only difference is that gog has no voting rights, while gogl is entitled to one vote per share. In fact, they also have another shared class, which has 10 votes per share.

These super voting shares are owned by the founders and are not publicly traded. It's quite common for founder-led companies to have share class structures with unequal voting rights. The founders need outside capital to invest in growing the business, but at the same time they want to keep full control. For example, the publicly traded shares of snapchat have no voting rights founder and ceo evan spiegel owns more than 90 of the voting shares, despite snapchat being a publicly traded company.

Evan can pretty much do whatever he wants. If he mismanages the company, the public shareholders have no way to remove him going back to google, given that the founders control the company anyway, the voting rights of gogl are pretty much useless. There's really no fundamental reason why gog and gogl should trade at different prices? The fact that they do creates an arbitrage opportunity in the case of google, the difference in share price is so small that there's not much money to be made from the arbitrage trade. However, there are many stocks with much bigger discrepancies between share prices.

There are many hedge funds which trade almost exclusively on share class arbitrages. This falls under the category of event-driven arbitrage, event-driven arbitrage. Hedge funds have returned an annual return of 12.2 from 1990 through 2009.. That handily beat the s p 500, which returned only 5.4 percent.

Additionally, they had a beta of 0.32, which means they have a low correlation with the broader market. The share class arbitrage strategy is simple, but difficult to do well, all it entails is logging, the shares of the undervalued share, class and shorting the shares of the overvalued chair class. If the two share classes eventually converge in value, the arbitrage order makes a profit when doing an arbitrage. There are a couple things that traders have to consider.

Firstly, they have to understand why the price discrepancy exists in the first place. Secondly, they have to understand the risks of the trade. The main risk of an arbitrage trade is a short squeeze when a lot of hedge funds are doing the same arbitrage trade, the overvalued share class ends up getting a very high short interest. These chairs often have a very small free flow.

For example, liberty, trip advisor is a tracking sock which is tied to the performance of liberty, media stake and travel company trip. They have two share classes series: a and series b series a shares have rights to one vote per share, while series b is entitled to 10 votes. The vast majority of the series b shares are owned by liberty. Media ceo, greg mafay buffet is a long-term holder of the shares and doesn't actively trade them.

This means that the free flow publicly traded on the market is very small that led to a situation in april of 2020, where the class b shares had a massive short squeeze with no apparent catalyst. They skyrocketed almost one thousand percent and have stayed elevated since then. Today, they still trade at an almost 700 percent premium to the series a shares, despite the fact that they have the exact same economic rights to the company. Needless to say, this has been a disaster for the hedge funds trying to make an arbitrage trade as they lost almost 10 times their invested capital.

It can make sense that the voting shares trade at a premium to the non-voting shares. The founders and controlling shareholders are willing to pay a premium for the voting rights because they want to maintain control of the company. But sometimes you can find strange situations where the voting shares trade, a significant discount to the non-voting shares. For example, liberty, formula, 1 series c shares have no voting rights, and yet they trade at an almost 10 premium to the series, a shares which have one vote per share for full disclosure, i'd personally own a long position in fwona and a short position in fw.

On k, the voting rights of the class a shares are pretty much worthless because there are also series b shares which have 10 votes per share. Almost all of these chairs are owned by liberty, media they trade on the otc market and, as you can see from the graph, they have almost no liquidity liberty, media controls. The majority of the voting rights with the class b shares, so they can always override the class, a shareholders in a company vote. So, while the voting rights of the class, a shares are pretty much worthless, there's no fundamental reason to explain why they trade at a discount to the class c shares which have zero voting rights.

The premium of the class c shares can possibly be explained by its higher trading volume. There are more class c shares in class a shares on a typical day. Around 700 000 class c shares trade hands, while only about 150 000 class. A shares trade hands institutional investors who manage billions of dollars may prefer to buy the class c shares as they'll have less slippage, should they enter or exit a large position.

This chart compares the stock price performance of the series, a shares, fwona and the series c shares fwonk. They usually trade very close together, but in recent years the gap has widened significantly. Over the past few years, fwna has traded at a roughly five percent discount to fw01k. Currently, the discount is close to 10.

In these arbitrage positions, the main risk is in a short squeeze on the overvalued shares, which you could have in a short position. In the case of fwonk, its liquidity is very high, so a short squeeze is probably unlikely for investors who don't want to take on the risk of shorting. Another way to play these situations is to buy the undervalued share class unhedged. This way you can benefit if the valuation gap closes.

However, it also requires you to take on a net long position in the company, which adds its own risks. We've created a portfolio with what we think are the three most attractive share class arbitrages. Keep in mind that this is not financial advice. It is just showing you some of our own positions.

We've also created a database of all the companies with multiple shared classes, traded on the new york stock exchange and the nasdaq. If you want to support us on patreon, we made a new tier called arbitrager, which gives access to the database reports explaining our arbitrage positions and alerts whenever we make a change to the arbitrage portfolio. Our patreon tier also has all of these benefits, but also includes access to our main stock portfolio. You can access our public access portfolio, which shows the top three stocks in the main portfolio, as well as the arbitrage portfolio.

These can all be seen on our patreon page link in the description below alright guys that wraps it up for this video. What do you think about these share class arbitrages? Let us know in the comments section below, as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.