Is Merger Arbitrage going the way of the dodo?
| Mar 17th, 2009 | Filed under: Academic Research, Hedge Fund Industry Trends, Today's Post | By: Alpha Male |
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Hedge funds are a diverse lot. Over time, the success of various hedge fund strategies can diverge significantly. Just check out the last 12 months when the HFR Energy hedge fund index was down nearly 40% while “Systematic Diversified”, (a global macro strategy) was up over 6%.
It seems that every strategy eventually has its day in the sun. With many hedge fund strategies showing a healthy dose of cyclicality, it can sometimes be difficult to identify long-term secular changes that could spell doom. Between 2000 and 2004, many prognosticators said that convertible arbitrage was extinct since valuing converts – once rocket science – could now be done on a high school calculator (you know…using the “covert arb” button on your old Casio calculator-watch…admit it, you had one.) Yet the strategy got up off the mat in 2004 and resumed growing until recently being sideswiped by short-bans. More…
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The study appears to cover a period ending in 2007. The spreads in merger arb opportunities have widened considerably over the last fifteen months. Consider Inbev/BUD and Roche/Genentech.
Leave it to academics to ignore the crucial data of 2008, when risk arb spreads, due to financing shakiness, consistently blew out to historical levels, in some cases greater than 20% gross. Merger arb is not dead, and will not be dead. Like all strats, it goes in cycles.