Merger Arbitrage Fund Can Offer Diversification

Merger arbitrage has long been thought of as a professional strategy that is off-limits to ordinary investors. Fortunately, the Merger Fund makes this strategy attainable and approachable to a broad swath of market participants.

MERIX has merit on the basis that merger arbitrage is an alternative strategy that has the potential to decrease correlations to traditional asset classes within investor portfolios while reducing volatility. In other words, MERIX could be a win-win proposition.

“While merger arb has historically been considered a cyclical strategy, Kevin Russell, CIO of UBS’s O’Connor hedge fund, said he believes the strategy is pivoting to become a consistent, uncorrelated investment approach,” reported Jessica Hamlin for Institutional Investor. “Deal uncertainty adds a certain level of risk. With funds generally taking a long position in the company being acquired and shorting the company making the acquisition, a failed deal will leave a mark.”

As noted above, aggregate fixed income and broad market equity strategies are declining in unison this year, leaving advisors and investors searching for answers.

“This year, we expect absolute return strategies to serve an especially important role in diversified portfolios, as we believe beta strategies will offer more muted returns compared to their recent history,” wrote Russell in a letter to clients earlier this year. “In fact, we expect one of the big stories for investors in 2022 will be likely lower returns from beta investments in equities, credit and fixed income.”

Amid rising interest rates and sticky inflation, alternative assets are taking on added allure. Potentially further supporting the case for MERIX is the specter of a U.S. recession. Under such a scenario, it’s unlikely that plain vanilla equity funds will deliver for investors, underscoring the viability of considering MERIX in what could be a trying economic climate.

“The combination of persistent inflation pressures and tightening monetary policy is likely to weigh on returns in both credit-spread products and longer duration fixed income,” added Russell. “And as often as we implore investors to consider alternative investments on an absolute basis and to assess their performance based on the diversification, lower correlation, and volatility reduction they bring to diversified portfolios, our sense is that investors often view their alternative investment returns through the lens of long-only beta investments.”

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