Merger arbitrage is a complex game played by sophisticated financial pros outside the mainstream of retail investing.
It is the method of profiting from share-price movements of buyers and sellers in corporate buyout situations, often by purchasing shares of takeover targets while hedging bets by short-selling the stock of suitors. It’s exploding in popularity – funds dedicated to such strategies now have an estimated US$71-billion of assets under management globally, triple the amount five years ago, according to BarclayHedge.
A new fund is aimed at giving Canadian retail investors a piece of the action with an exchange-traded fund (ETF) style of security. The Accelerate Arbitrage Fund from Accelerate Financial Technology Inc. aims to achieve long-term capital gains and a risk-adjusted return by outperforming the S&P Merger Arbitrage Index. The index tracks price changes for a global selection of publicly announced mergers, acquisitions and other corporate reorganizations.
Until now in Canada, accredited investors have mostly participated in this corner of the market through private hedge funds, but Canadians have not had a vehicle with an easy ETF-type fee structure. The fund has an 0.95-per-cent annual management fee and no performance fee.
The new fund follows others that the Calgary-based company has launched. Founder and chief executive officer Julian Klymochko, a veteran arbitrageur, has described them as vehicles for “democratizing alternative investing." Among its others are the Absolute Return Hedge Fund and Private Equity Alpha Fund, all listed on the Toronto Stock Exchange. The arbitrage fund is awaiting a TSX listing under the symbol ARB.
In a recent blog post, Mr. Klymochko pointed out that merger arbitrage has outperformed mutual funds that focus on buying and holding securities as well as passive benchmarks, such as index funds. In addition, the average yield from merger arbitrage has been about 5.9 per cent, compared with a triple-B bond index yield of 3.2 per cent, he wrote.
According to the preliminary prospectus, the fund will take long positions, that is, buying the shares or other securities of takeover targets listed in North America, Europe and Australia. It will also take short positions in acquisitors. In a short sale, an investor borrows securities to sell on the expectation that the price will fall, and repays the loan by returning new shares at the lower price. In a merger in which the suitor is bidding only in cash, the fund may buy the target’s securities without an accompanying short position, it said.