Our research shows that the universe of target companies creates positive excess returns relative to the equity markets and that owning a broad cross section of deals exposes the portfolio to the positive excess returns. Further, employing some simple mechanical screens can improve the positive excess returns. Our work also demonstrates that although there is some degradation in performance by employing a mechanical approach at the end of each month as opposed to daily, the positive excess returns from a monthly rebalance are still significant.
Finally, we show that a mechanical implementation of a strategy that invests in a broad range of announced deals can deliver positive excess returns with an attractive return to risk ratio. The strategy can be enhanced through hedging which can be accomplished either by short exposure to the broad market or by going short in the acquirer names. Both methods can improve the return to risk ratio by lowering the volatility of the portfolio but also lower the return of the portfolio.
As of July 8, 2014, MNA held approximately 50 companies that were targeted to be acquired. This included many high profile deals, including some recently announced acquisitions by Level 3, Oracle and SanDisk. Based on our rules-based methodology, this list will continue to be update monthly, with new announced deals added and completed transactions rolling off. In this way, MNA will offer investors a dynamic portfolio, and a compelling broad-based vehicle for participating in an M&A boom that shows every sign of continuing for some while.
This article was written by Adam Patti, chief executive officer of IndexIQ, which sponsors the IQ Merger Arbitrage ETF (MNA).