With markets experiencing wide oscillations, ETF investors can still look to alternative investment strategies to bolster and diversify their portfolios.
“What we’ve been advising our FAs as well as clients is we’re realizing they’re underweight, generally have been underweight alternatives, trying to hedge out that risk because there really hasn’t been a lot,” John Lloyd, Managing Director and Head of Research Platform Group for IndexIQ, said at the Charles Schwab IMPACT 2018 conference.
Consequently, IndexIQ has seen alternative strategies like the Index IQ Merger Arbitrage ETF (NYSEArca: MNA) gain more traction. The ETF employ a type of alternative, “directional hedge fund strategy” called merger arbitrage. Specifically, the fund capture the spread or difference between a stock’s trading price before a deal is announced and its eventual takeover price.
“It has done exactly what it was made to do,” Lloyd said. “For most of the down days, it was positive. It actually has negative correlation to fixed-income index and actually has a very low correlation to the equity index.”
Lloyd also added that the U.S. is in the third year of record mergers. Corporate America has experienced a cash infusion after President Donald Trump’s tax reforms that allowed U.S. companies to repatriate foreign cash stores during a tax holiday period. Consequently, these flush U.S. firms are eyeing acquisition targets to enhance their businesses.
“The merger arbitrage tends to do really well in those kinds of environments, and we think that’s going to continue,” Lloyd added.
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