In recent conversations with investors, research analysts at BHA have noticed an increasing interest in merger-risk arbitrage. This is after the strategy saw its worst years in 2008 and 2009. HedgeFund.net reports, “The strategy had a big year in 2006, gaining 12.93% on the HFN Merger-Risk Arbitrage Index. In 2007, when the Dow Jones Industrial Average peaked at 14,093 and deal volume hit $1.57 trillion, the strategy also performed well, returning 6.42% on the HFN Merger-Risk Arbitrage Index. But in 2008, the strategy tanked hard, losing 2.89% on the HFN Merger-Risk Arbitrage Index during the worst ever annual performance for the asset class, a 15.75% loss on the HFN Hedge Fund Aggregate Index. Deal flow was sluggish, and the global credit crisis tightened deal making.”1
Now that the credit market has seen some loosening, merger-risk arbitrage deals are on the rise again. Although merger-risk arbitrage is correlated to the overall credit market, investors are still attracted to the strategy since it is not affected by the equity market’s ups and downs.
A large wealth advisor based in Brazil with more than $200 million invested in hedge funds is interested in hearing from managers in the event-driven space, more specifically from funds that are focused on merger-risk arbitrage strategies. The firm is looking to place capital into three to six funds and it wants at least a couple of them to be in event-driven merger-risk arbitrage. The firm believes the strategy is going to provide good returns and have low correlation to the market.
After 2008, the merger and acquisition space has seen a tremendous increase in the number of deals being done. As a result, managers running merger-risk arbitrage funds have more deals to trade on and greater opportunities. Investors are realizing the potential that the strategy holds once again.
1 HedgeFund.net, “Merger-Risk Arbitrage Set for 2010 Surge,” March 22, 2010, http://www.hedgefund.net/publicnews/default.aspx?story=11076.
