Credit Suisse rolled out the latest addition to its ETN lineup on Monday, launching the Credit Suisse Merger Arbitrage Liquid Index (CSMA). The exchange-traded note will be linked to an index designed to employ a merger arbitrage strategy by using a quantitative methodology to track a dynamic basket of securities held as long or short positions to reflect publicly announced merger transactions. CSMA will essentially seek to buy stocks that have been announced as takeover targets but for which the transaction has not yet closed. Because there is usually some degree of uncertainty as to whether an announced transaction will ultimately be consummated–regulatory and financing hurdles, as well as shareholder approval, are among the potential obstacles to closing a deal–takeover targets will often trade at a discount to the announced target price.
By investing in stocks of publicly-traded takeover targets, investors can profit if the deal is ultimately completed, pocketing the difference between the purchase price and the deal price. But there is certainly some risk in the “arbitrage” strategy; if the deal is derailed for any reason, the share price will often sink to the level prior to the announcement [see Closer Look At Hedge Fund ETFs]. The merger arbitrage strategy will often exhibit a relatively low correlation to the broader equity markets.
The merger arbitrage strategy certainly isn’t a new investment idea; it has been popular among hedge funds and other large, sophisticated investors for decades. But it is a relatively new innovation in the ETF space. IndexIQ launched the IQ Merger Arbitrage ETF (MNA) in late 2009; that product also seeks to invest in global companies for which there has been a public announcement of a takeover by an acquirer. While the strategies are generally similar, there are some differences between CSML and MNA. The Credit Suisse product is structured as an exchange-traded note, while the IndexIQ fund is a true ETF. Also, MNA maintains short exposure to global equities as a partial equity market hedge.
CSMA will be the third exchange-traded note from Credit Suisse; the firm also offers an ETN linked to an index comprised of MLPs (MLPN) and a product that utilizes quantitative analysis to construct a long/short basket (CSLS).
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Disclosure: No positions at time of writing.