ETF Chart of the Day: Merger Arbitrage Funds
January 26th, 2012 at 12:39pm by Paul Weisbruch, Street One Financial
As the exchange traded fund market matures over time, we are hearing more about actively managed ETFs as well as portfolios that deliver alternatives or hedge fund strategies to the investor. One sub-category that has emerged that fits this bill is that of merger arbitrage funds, of which three exist now in the marketplace.
From an assets under management standpoint, Credit Suisse Merger Arbitrage Liquid Index ETN (NYSEArca: CSMA) is the largest, with approximately $92 million in assets under management currently. The product is tied to a quantitative methodology and takes long and short positions and cash simultaneously, in order to reflect publicly announced merger and acquisitions that are in process.
IndexIQ Merger Arbitrage (NYSEArca: MNA) seeks to own announced takeover target companies and has short exposure via global equities that delivers an equity market hedge. The product follows the proprietary IQ Merger Arbitrage Index and currently, top holdings are as follows: VRUS (12.56%), GR (11.01%), EP (9.94%), MMI (7.99%), and MHS (5.67%).
Finally, Credit Suisse has another entrant in this space, and it is Credit Suisse 2X Monthly Leveraged Merger Arbitrage Liquid Index ETN (NYSEArca: CSMB). This product is designed similarly to CSMA, and simply follows the same index but offers leverage on the long side on a two times monthly compounded basis.
In the trailing one year period, CSMA is up 1.09%, MNA is down 0.08%, and CSMB has lost 1.19%. It should be noted that none of these funds trade heavy amounts of volume on a daily basis and visual bid/ask spreads can typically be quite wide.
Thus, proper technique and patience should be utilized in trading these funds, and assistance from an ETF execution desk that provides liquidity may be helpful as well.
For those advisors or institutions that are looking for alternatives based exposure in their portfolios and the liquid and transparent structure and relatively low costs of ETPs seem appealing to them compared to many of the stringent requirements and opacity of merger arbitrage hedge fund vehicles, the aforementioned funds may satisfy these needs.
IndexIQ Merger Arbitrage