Overview of Strategy
Market Neutral strategies generally go long and short the market. They typically invest in equity and debt securities of companies involved in a wide variety of corporate events. Merger arbitrage is the most classic form of a market neutral strategy. A merger arbitrage strategy entails buying the stock of a target company and shorting the stock of the acquirer, seeking to profit from the event.
Consider investing in a Merger Arbitrage strategy if you’re looking for:
- A balanced approach–The diverse nature of a merger arbitrage strategy gives managers the opportunity to potentially benefit from long or short exposures across multiple sectors.
- Downside protection – Because merger arbitrage strategies typically have beta exposure to the market that is around zero, the strategy may offer a way to mitigate significant losses during an equity market sell-off.
- Low correlation to markets – Since a merger arbitrage strategy typically seeks to eliminate exposure to the broader market, these strategies have also delivered attractively low levels of correlation to the equity and fixed-income markets.
Merger Arbitrage Investment Characteristics
|Low correlation to stock and bond markets|
|Strong return potential in rising rate environment|
|Stable volatility profile|
|Downside mitigation in negative markets|
Key Strategy Considerations
- Merger and acquisition environment
- Duration of transaction
- Absolute level of interest rates
- Current regulatory environment
- Industry specific consideration
- Probability of close calculation