One of the most talked-about investment themes of 2020 was the rise of special purpose acquisition company (SPAC). It was a new way for companies to go public, and it bypassed the traditional IPO process which can be onerous in terms of cost and time. Specifically, this involves doing a roadshow to drum up interest among institutional investors and meeting regulations.

These are certainly drawbacks, but the silver lining is that it does grant companies some sort of legitimacy as the investments banks, who are part of the IPO process, have a stake in ensuring that these companies perform well and are reporting correct financials.

SPACs work in a totally different way. In essence, there is a dummy or shell corporation that conducts a "reverse merger" with a private company to bring it public. Investors in the shell company receive a stake in the new public entity which gets to raise money and go public at minimal expense and time.

Of course, the drawback to this became clear in 2021. Many of the new issues simply have failed to perform as well as expected or in line with what management was projecting. There have also been a handful of companies that are being investigated for fraud.

Normally, SPACs were not a viable option for most companies, but this changed in 2020 when there was a huge influx of capital and speculative interest in markets. No doubt a contributing factor was the Federal Reserves's easy money policies. However, this meant that SPACs became a hot target of capital and led to outsized returns at least in the initial months which also led to more flows and interest in the category.

Some saw this as the start of a new trend, while others saw this as a brief aberration that foreshadowed poor returns. As of now, the latter group seems correct as SPACs performed very poorly in 2021. Overall, the SPACs were down by about 30%, however, it's much worse if you look at the bottom 50% as only a handful were in the green.

One major factor in this group's poor performance is the Fed's hawkish pivot which makes growth and speculative stocks less attractive. Another is that the bull market and elevated risk appetites mean that many companies were simply way too expensive when they came on the market, leading to poor returns. And, the final factor is that many of these companies have simply failed to deliver the strong growth that they were promising and investors were assuming.

Entering 2022, rising short-term rates remains a powerful headwind, but at some point, this will abate, and at that point, there will certainly be many opportunities in the space for savvy investors.