Merger & Arbitrage Strategies

Merger and arbitrage activity in the U.S. has picked up this year, registering 34% higher than in 2012.  Exchange traded funds such as the ProShares Merger Arbitrage ETF (NYSEArca: MRGR) are a simple way for investors to gain risk-adjusted returns to such strategies.

“Academic research has concluded that investors can enjoy attractive, risk-adjusted returns from merger-arbitrage strategies. What’s more, M&A-oriented products can offer bondlike returns that are typically uncorrelated with equity or bond market performance. And investors can expect better performance from merger-arbitrage funds in an environment of heightened deal activity because it offers index providers and managers more deals to invest in,” Robert Goldsborough wrote for Morningstar.[Hedging Rate Risk with Bond ETFs]

Merger arbitrage strategies give investors the benefit of exploiting the gap between the proposed purchase price for an acquisition target and the price at which it is trading after the announcement but before the close, reports Goldsborough. M&A activity is bustling in the United States as corporate balance sheets are healthy and private equity firms are making exit strategies for deals made with buyouts that took place between 2005 and 2008. [Hedge Fund ETFs]

Foreign M&A activity has been down over the first half of 2013, but this too will pick up. Many of the recent headlines involving U.S. companies going through M&A buyouts also included at least one foreign or overseas company.

Currently, the biggest risk to the M&A activity is high stock market valuations that would deter potential acquisition target companies. For now, good stock market valuations and low debt costs are creating a good market for investors to capitalize on these strategies. Deal risk is the largest concern for investors who want to access exposure through an ETP strategy. These funds give bond-like returns that are uncorrelated to equity and bond market performance, making them an ideal diversification tool.[Let’s Make a Deal: A Look at Merger Arbitrage ETFs]