In this report, we explore the growing investor appetite for merger arbitrage in the context of rising M&A activity. We also discuss how managers have been adapting to the structural decrease in deal spreads and have maintained alpha generation intact.?

Philippe Ferreira

Head of Research - Managed Account Platform
 

Moez Bousarsar

Head of Event Driven Strategies - Managed Account Platform

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In this report, we explore the growing investor appetite for merger arbitrage in the context of rising M&A activity. We also discuss how managers have been adapting to the structural decrease in deal spreads and have maintained alpha generation intact.?

Firing on all cylinders. M&A activity is up strongly year to date, especially in the US. In Europe, the cycle is now taking off, with large deals announced end-April in the telecoms, media and technology (TMT), pharma and materials areas.

These levels of activity have provided numerous opportunities for alternative managers at a time when investor appetite for merger arbitrage keeps growing. Additionally, performance has been in line with expectations. Event Driven has posted average returns close to 3% year to date and has been the best performing strategy in Q1-14 according to HFR.

An important factor affecting the way M&A is played by risk arbitrageurs has been the significant spread compression over recent years. Plain vanilla deals currently offer annualised returns in the 3-4% range. As a result, risk arbitrageurs have had to climb up the scale of complexity to deliver returns. They have focused their investment universe on deal structures where returns can be much higher, i.e. in the 5-10% range. This includes topping bids, hostile deals and transactions taking place in multiple jurisdictions or exposed to antitrust risk.

After having posted double-digit returns in 2013, event-driven funds are leading the pack in 2014 thanks to their skills in picking the right deals and sizing positions adequately. Rising opportunities related to skyrocketing M&A activity are consequently likely to confirm merger arbitrage’s position as one of the strategies with the best outlook for the rest of 2014.