In departure from tradition, merger arb funds now seem to be hitching their wagons to the S&P
| Dec 8th, 2009 | Filed under: Academic Research, Hedge Fund Industry Trends, Today's Post | By: Alpha Male |
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Although many hedge fund strategies have relatively low market correlations, it can be notoriously difficult for them to avoid getting sucked into a market downdraft. Last year’s negative performance across several strategies is proof. One strategy that has traditionally had a low correlation during normal times, but a propensity to sink during market storms is Merger Arbitrage. As we recently discovered, however, this asymmetric quality seems to be waning. More…
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[...] We noted in late 2009 that merger arb has shown a particularly high correlation to the S&P 500 in recent years. And academic studies have shown that “arbitrage spreads” have been falling since 2002. Some say this is emblematic of a growing capacity constraint in the strategy. But regardless of their source or recent declines, merger arb returns have averaged around 1% per month over several decades. [...]