“The goal of a merger arbitrage strategy is to provide more consistent returns and possibly deliver a smoother return path for investors. A merger arbitrage strategy can also serve as an important capital preservation tool and provide drawdown protection in tumultuous markets,” according to an IndexIQ research note.
The merger arbitrage strategy may also help diversify a traditional equity and fixed-income portfolio as this alternative investment has exhibited low correlation to traditional asset classes with a low standard deviation and beta as compared to other benchmark indices.
“An allocation to a merger arbitrage strategy can improve the risk/return profile of a traditional portfolio. The driver of returns for merger arbitrage strategies is isolated from broader markets, so the performance of such a strategy is not expected to be highly correlated to other asset classes over time. In addition, merger arbitrage strategies have significantly lower beta sensitivity to the broader market,” according to IndexIQ.
For more information on alternative strategies, visit our alternatives category.