Merger Arbitrage Performance
Hedge Funds Return to Merger ArbitrageHedge fund merger arbitrage activity is picking up after a dry spell. Hedge funds focused on merger arbitrage gained 8%, that is below the average hedge fund gains but an improvement still. As executives are able to complete deals more confidently, arbitrage traders are expected to make more significant gains.
Times are good for arbitragers because there is less competition in the merger game. Proprietary trading desks of many brokerage firms have been shrunk or eliminated, and some multistrategy hedge funds have switched from merger investing. That is why the spread between an acquisition target's share price and a deal price has expanded.
Today, target companies typically trade about 12% below an offer price. That is down from about 15% earlier this year, but higher than the 10% or so for most of this decade.
In past years, acquisitions were sometimes announced by parties still hoping to secure sufficient financing. Sometimes that wouldn't materialize. Now, only those with pretty secure financing are launching offers. And fewer deals are being undertaken by private-equity firms, which have proved more likely than strategic buyers to get cold feet and walk away from a deal. Source
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