Sirius XM Holdings (NASDAQ:SIRI) stock closed higher by more than 40% yesterday on the heels of an apparent short squeeze. Based on the most recent data, SIRI stock carried a short interest of 33%, one of the highest out of all stocks in the Russell 1000. Barron’s reports that traders could have also been exiting an arbitrage trade where they went long Liberty SiriusXM Corp Series A (NASDAQ:LSXMA) and short SIRI stock. LSXMA acts as a tracking stock that was created by Liberty Media Corp (NASDAQ:FWONA). Liberty Media owns about 83% of LSXMA stock.
It’s worth noting that Berkshire Hathaway’s (NYSE:BRK-A, NYSE:BRK-B) Warren Buffett owns a significant stake in both LSXMA and Liberty Media Corp Series C (NASDAQ:LSXMK).
Hedge funds piled into the SIRI/LSXMA arbitrage trade, as LSXMA was trading at a “roughly 35% discount to the value of its asset in June.” The tracker’s assets include 3.2 billion shares of SIRI and about a 30% stake in Live Nation Entertainment (NYSE:LYV).
SIRI Stock: What to Know About the Liberty Media Arbitrage Squeezing Sirius XM
The arbitrage trade took a turn south following SIRI’s massive gain over the past few weeks. According to Barron’s:
“The spread between Sirius and Liberty Sirius has now blown out to about 55% with the value of Liberty SiriusXM’s stakes in Sirius XM and Live Nation approaching $80 per Liberty SiriusXM share, Barron’s estimates.”
Hedge funds shorting SIRI stock may have reached “drawdown limits,” which means that they could possibly be covering their arbitrage trade. In addition, LSXMA stock remained relatively stable yesterday, despite SIRI’s 40%-plus gain. This could also indicate a covering of the arbitrage trade. Rumors are also swirling that SIRI could benefit from the Nasdaq-100 rebalancing, which would result in more shares of the company being bought by the index.
The trade was seen by many as an attractive investment opportunity, as the gap between SIRI and LSXMA has averaged about 34% during the past five years. In addition, Liberty Media previously announced that tracker stock LSXMA would be split into two tracker stocks. One would track Sirius XM, while the other would track Live Nation.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
