Looking For Drift: Finding Alpha in Share Buyback

Announcements

Anju Marempudi Seong Lee

Objectives -  Overview of Share Buybacks -  Asking the question: How do we find alpha?

-  Find out what the data looks like -  Walk through abnormal returns found in event study -  Craft an algorithm based off final results

-  Incorporating multiple events with EventVestor

What are Share Buybacks?

What are Share Buybacks? -  Buying back outstanding

shares -  Tender offer -  Buying from market -  ASR

Why Companies Perform Share Buybacks -  Buybacks are increasing in recent years

-  Better ROE and ROA -  Value for investors -  Undervalued company -  Tax benefits before 2013

-  Buybacks were taxed at capital gains -  Dividends were taxed at income-rates

-  Buybacks can backfire

-  “It’s just not the way to run a business.” - Buffet

How do I find alpha?

Finding Alpha -  What does the data look like? -  What do abnormal returns look like around the event? -  Can we use that to create a viable trading strategy?

What does the data look like?

Ticker Event Date

Size of BB

Trade Date

Total Number of Announcements -  Average Growth Rate: 8% per year -  From 2007 - 2014: 46% increase

Size of Buyback Announcements -  Smaller buybacks are more popular

-  ~800 smaller vs. 300 bigger in 2014 -  Growing at the same pace: ~11% YoY median increase

What do abnormal returns look like?

Cumulative Returns vs Benchmark

Cumulative versus Abnormal -  Abnormal Returns ~= 0.60% -  Cumulative Returns ~= 1.42%

Trends in abnormal return volatility

The Trading Strategy

PSBAD Algorithm -  Trading on buybacks with a size greater than 7.5%

-  Returns: 144.5% -  Sharpe: 1.66 -  Drawdown: 16.5% -  Community Post

-  Soon live trading available with E*TRADE

Event Driven Strategies with EventVestor

Growing Popularity of Event-Driven Strats -  19% increase in net demand for Event-Driven strategies, according to the

2014 Credit Suisse survey. -  Most funds focus on few events, but more and more funds are expanding

to additional corporate events for alpha generation -  Beyond hedge funds, event-driven strategies are gaining ground with

mutual funds and ETFs . -  Corporate Events add significant boost to quant trading strategies -  Event-driven investors are increasingly using the portfolio approach,

building portfolios with high sigma events, there by increasing the portfolio hit rates

-  Hedge funds looking to profit from rising and falling share prices (long/short equity strategies) also benefit and generate excess returns using corporate events overlays on market data

-  Event-driven strategies provide an alternate investment strategy with low correlations to economic and market trends.

More Alpha Generating Events

-  CEO Changes -  Clinical Trials -  FDA Decisions -  PDUFA Dates -  Dividend Changes -  Earnings Releases -  Earnings Guidance -  Index Changes -  Equity Issue

-  Insider Transactions -  Activist Transactions -  Litigations and

Regulatory -  Mergers & Acquisitions -  Proxy Contests -  Retail Same Store Sales -  Shareholder Activism -  Spin-offs -  Stock Splits

Dividend Initiations

Dividend Initiations 2010 (Under $1B Market Cap)

Dividend Increases

Dividend Increases 2010 (Under $1B Market Cap)

Raises Earnings Guidance

Raised Quarterly Guidance (S&P 400 - 2011)

Withdraw Earnings Guidance

Guidance Withdrawal (Russell 1000)

Insider Transactions

Insider Transactions – Sold Shares

Proxy Contest

Proxy Context Announcement

Spin-off Event-Driven Performance -  Announcements between January 2009 and April 2013

EventVestor events to be available in Q 10-K Filings Divestment M&A Announcement 10-Q Filings Dividend M&A Approval 13D Filings Downsizing M&A Close 13G Filings Earnings Preview M&A Related 8-K Filings Earnings Release M&A Withdrawal Alliance Earnings Restatement Patents & Copyrights Asset Purchase Exec Bonus and Grants PDUFA Dates Asset Sale Executive Changes Poison Pill Bankruptcy FDA Filings Product Recall Board Changes Guidance Product/Service Business Expansion Impairments and Charges Proxy Contest Business Unit Close Index Additions Proxy Meeting Business Unit Purchase Index Deletions Proxy No-Action

Letters Business Unit Sale Insider Transactions Proxy Voting Results Business Update Institutional Transactions Redemption Buyback Investment Refinance Buyback Update Investor Meeting Reorganization CEO Change Issue Debt Same Store Sales Clinical Trials Issue Equity Secondary Pricing Conference Joint Venture Settlement Contract Win Layoff Spin-off Credit Facility Legal/Regulatory Stock Split

Listings Related Strategy

Tender Offer

Thank You.

Questions?