UBS O’Connor, the $12bn hedge fund unit of UBS Asset Management, remains optimistic about the potential for a rebound in merger-arbitrage performance despite a difficult YTD due to regulatory challenges disrupting high-profile deals, according to a report by Bloomberg.

The merger-arbitrage sector has produced some of the lowest hedge funds returns so far in 2024 prompting some managers to exit the space completely. But the report cites an anonymous source familiar with UBS O’Connor's strategy, as revealing that the fund has kept about one-third of its portfolio in merger-arbitrage for the past couple of years.

And with the US presidential election looming large, a shift in the regulatory environment could be on the cards and with it a change in fortune for merger arbitrage.

Since Federal Trade Commission (FTC) Chair Lina Khan took office in 2021, her aggressive antitrust policies have expanded deal spreads. Investors are also awaiting regulatory updates and trial decisions on key deals, such as Tapestry Inc's acquisition of Capri Holdings Ltd, which are expected before the end of the year.

The report quotes Blake Hiltabrand, Global Head of UBS O'Connor’s business, who has over two decades of experience in the merger-arbitrage market, as saying that: "This quarter appears to be rich in catalysts, driven mainly by the US election and several deals reaching critical inflection points."

According to research firm PivotalPath, merger-arb has returned 3.5% so this year, which although an improvement on mid-year figures, still trails the broader hedge fund industry's 8.3% gain.