Market Neutral – Merger Arbitrage

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.

Strategy Benefits

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