merger arbitrage Concepts

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing

by Vijay Singal · 15 Jun 2004 · 369pp · 128,349 words

trading patterns trading patterns xii 6 7 8 9 10 11 Mispricing of Mutual Funds Trading by Insiders Changes to the S&P 500 Index Merger Arbitrage International Investing Forward Rate Bias Event based Daily Event based Event based Continuous Continuous Not very difficult Easy Easy Not difficult to marginally difficult Not

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of capital at risk including the effects of leverage, and the maximum possible loss. For example, an arbitrageur may be allowed to invest only in merger arbitrage securities or only in distressed securities, with loss limited to 10 percent of the capital invested. While these constraints protect the owners of capital, they

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effect relies on the behavior of short sellers with regard to unhedged short sales, as distinct from hedged short sales.3 Hedged short sales include merger arbitrage where an investor short-sells the bidder and buys the target (see Chapter 9), index arbitrage between futures and cash markets, short selling by

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sale activity because (1) they are usually not part of an index (no index arbitrage), (2) they are not likely to be takeover candidates (no merger arbitrage); and (3) the high volatility of IPOs inhibits other types of nonspeculative short sellers from trading them. Results with IPOs show that the weekend effect

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the Random Walk limitations. First, strategies involving momentum-based trading of individual stocks require extensive short selling. Hedged short sales, as in the case of merger arbitrage, may be acceptable to most investors, but open, unhedged short positions are generally avoided by individuals and institutions alike. Therefore, ideally a trading strategy should

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the FDA’s decision to delay approval of a drug application submitted by Imclone. More than a decade ago, Ivan Boesky (see Chapter 9, on merger arbitrage) was jailed for insider trading and fined $100 million. Since the media focuses on illegal insider trading, many investors mistakenly believe that all insider trading

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operate in a different environment. Moreover, none of the evidence presented above includes deletion of any foreign companies. 195 196 Beyond the Random Walk 9 Merger Arbitrage When a merger is announced, the target’s price should rise close to the bidder’s offer for the target. However, in most cases it

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risk arbitrage is used extensively by institutions and sophisticated investors, it is not frequently discussed in the media.1 The first major public disclosure of merger arbitrage was made by Ivan Boesky in his 1985 book Merger Mania—Arbitrage: Wall Street’s Best Kept Money-Making Secret, though a couple of stories

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that might occur after the intended merger has been announced. This activity is perfectly legal. On the other hand, trading before merger announcement based 196 Merger Arbitrage on nonpublic information is illegal (see Chapter 7). Ivan Boesky, a well-known takeover speculator, became famous in the mid-1980s when he was charged

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referred to as the speculation spread. The idea is to capture the speculation spread in an efficient and selective manner. In the subsections below, the merger arbitrage process is considered for stock mergers, cash mergers, mergers with collars, and mergers where multiple bids are made for the same target. STOCK MERGERS—SINGLE

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) Jindra and Walkling (2001) Pure cash or pure stock Baker and Savasoglu (2002) Accounts for various kinds of costs and risk Mitchell and Pulvino (2001) Merger Arbitrage a Special Notes 203 204 Beyond the Random Walk abnormal return times six. This corresponds to the “Annualized Abnormal Return” column. The failure rate represents

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of upward revisions. The average lead time, from announcement to completion or withdrawal, is seventy-two days. A majority of the offers (62 percent) are Merger Arbitrage Table 9.2 Cash Mergers Valued at More than $10 Million, 1981–1995 Completions Completed Withdrawn Total sample 350 (97%) 12 (3%) 362 (100%) Revisions

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risk-free. This also implies that the greater the probability of success, the larger the number of investors and other arbitrageurs, and therefore a smaller merger arbitrage spread. Thus, a greater probability of success is accompanied by a smaller speculation spread. On the other hand, if investors assign a low probability of

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Pulvino (2001) No effect—Baker and Savasoglu (2002); Mitchell and Pulvino (2001) No effect—Baker and Savasoglu (2002) Beyond the Random Walk Table 9.4 Merger Arbitrage of the target remains unchanged and the bidder may need external financing. Therefore, there is a greater likelihood for the merger to fail. A 5

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large stake in the firm, then it can be instrumental in accepting or rejecting the bid. ARBITRAGE ACTIVITY The role of arbitrageurs is important in merger arbitrage. They can become instrumental in the success or failure of a merger because they are more willing to trade their shares than individual shareholders or

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-yield events. Nonetheless, all of the studies in Table 9.1 explicitly account for transaction costs. Even with conservative assumptions, the minimum annual abnormal return Merger Arbitrage is 4 percent. With less conservative and more realistic assumptions, the abnormal return is about 10 percent per year. The second explanation relates to accounting

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high around events. However, risk around mergers is different. Since the position of the arbitrageur is essentially hedged (except against a withdrawal), the risk of merger arbitrage is rather low. The systematic (market-related) risk is close to zero in most instances except in downtrending markets. Even in those cases, the beta

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for a typical stock merger. Information is plotted for Cardinal Health’s acquisition of Bindley Western Industries in December 2000. 212 Merger Arbitrage USING OPTIONS Options are not recommended for merger arbitrage because they are too expensive. The value of an option can be divided into its intrinsic value and its time value. The

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Returns for EMAAX and LMRFX are for part of 2001. *Ceased to exist in 2002. Beyond the Random Walk Table 9.5 Merger Arbitrage Although the four funds invest primarily in merger arbitrage, they may (and do) follow many related strategies. Thus, the returns of these funds may be contaminated by other arbitrage activity

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that were the subject of an unsuccessful takeover attempt. The Gabelli ABC fund can engage in any kind of arbitrage activity, though it concentrates on merger arbitrage. The Enterprise Mergers and Acquisitions Fund also looks for firms that are likely to be acquired. To make sure the mutual funds are representative of

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, insufficient volume, or low price. Large arbitrageurs may have resources to pick deals with a high probability of success, but those deals generally have lower merger arbitrage spreads. To earn the returns documented in academic research, the investor does not require superior information to select any particular deals, since the research includes

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speculation spread will generate a sufficient return if the order is filled. Closing Positions in Targets and Acquirers The positions can be closed when the merger arbitrage spread has narrowed considerably and there is no chance of another competing offer or when the merger is close to completion. There is no need

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all stock mergers. The actual annualized return may be significantly higher in practice for other reasons. First, December 2000 was a particularly bad month for merger arbitrage. Due to deteriorating market conditions, the chance of merger failure was much greater than normal. Moreover, fewer mergers during that period meant that more arbitrage

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money was available for merger arbitrage driving down the speculation spreads. Second, it is possible and even desirable to close positions prior to merger completion so that they generate higher annualized

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holding period. Third, not all of the mergers listed would make good candidates for merger arbitrage. Merger Arbitrage Strategy Implementation The following section evaluates several deals and provides a stepby-step execution of merger arbitrage for one deal. CHOOSING DEALS FOR MERGER ARBITRAGE It is useful to consider each deal individually to determine whether it would be desirable

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trading suggesting a strong possibility of higher bids for the target. Since revisions are typically very profitable, the recommendation is to accept the deal for merger arbitrage. Merger Arbitrage Deal 14 (RGBK-MOR) is similar to deal 4 and should be accepted. Deal 15 (BRKA-JM) is similar to deal 5 with a similar

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has an extremely high speculation spread at 68.9 percent, which means that the bid will fail. Therefore, the deal should not be accepted for merger arbitrage. The average annualized return for the selected mergers is almost 16 percent. Coupled with low risk, this return far exceeds the normal market return. EXECUTING

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and the trading strategy recommendations rely on past data. Since future market conditions and market patterns may change without notice, there is no certainty that merger arbitrage will continue to be profitable. Furthermore, the analysis is based on abnormal returns, not raw returns, which means that if the market is falling, investors

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may lose money even though abnormal returns are positive. In addition, merger arbitrage can become particularly risky if the deals are not carefully chosen. A broken deal can potentially wipe away a significant portion of the profits earned

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• The evidence indicates that the speculation spread is larger than what it should be based on the duration and probability of failure. The purpose of merger arbitrage is to capture the excess speculative spread. • Studies have documented abnormal annual returns between 4 percent and 34 percent for different samples and periods. These

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returns are adjusted for risk, which is quite low for positions in merger arbitrage. • The arbitrage profit is affected by probability of success, time from announcement to completion, and the degree of arbitrage activity. If the speculation spread

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of 10 percent of the entire market capitalization—clearly, such a large amount of capital cannot be earmarked for merger arbitrage. • Investors can use mutual funds to capture returns from merger arbitrage or engage in merger arbitrage on their own using 227 228 Beyond the Random Walk stocks. The Merger Fund has generated an average annual

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abnormal return of 4.0 percent over the last decade. Hedge Fund Research’s Merger Arbitrage Index suggests an annual abnormal return of 6.4 percent without accounting for management expenses. • An ad hoc sample of mergers from December 2000 generates

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of 13.2 percent. Since the risk premium during 2001 was negative, the abnormal return could be higher. • Not all announced deals are candidates for merger arbitrage. If only the recommended deals are accepted, the annualized raw return increases to more than 16 percent. Execution of one stock deal is illustrated. Bottom

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mergers, merging firms, arbitrage spreads, and so on. http://www.mergerstat.com: Provides extensive statistics on mergers. Can also provide databases of historical merger activity. Merger Arbitrage http://www.thomsonfinancial.com: Go to “Solutions for Investment Banks” and then to “M&A.” Thomson Financial has numerous M&A-related products. The data

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. 1981. Inside the Arbitrage Game. Institutional Investor, August 1981, 41–58. Notes 1. The academic and practitioner literature calls this “risk arbitrage.” However, the term “merger arbitrage” is more descriptive because “risk arbitrage” can potentially refer to any arbitrage activity. This chapter draws from a large number of published and unpublished papers

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gains as determined by the mode of payment has been explored in Hansen (1987), Fishman (1989), and Berkovitch and Narayanan (1990). Finally, these works on merger arbitrage have been extensively used in this chapter: Baker and Savasoglu (2002), Brown and Raymond (1986), Cornelli and Li (2002), Dukes, Frohlich, and Ma (1992), Hetherington

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), Larcker and Lys (1987), and especially Mitchell and Pulvino (2001). Mark Mitchell is on leave from Harvard Business School and runs a merger arbitrage fund along the lines discussed herein. Merger Arbitrage 2. The only stories are Welles (1981) and Marcial (1983). 3. Appendix B has a primer on short selling. Short selling is

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fees, distribution and service fees, and other administrative expenses. Thus, the expense ratio understates the true returns from a particular strategy. Lipper Merger Fund, another merger arbitrage fund, closed in 2002 due to lack of investor interest. 7. Institutional holdings in a stock are available at the end of each calendar quarter

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, short-selling United Airlines and buying Delta Airlines on the belief that settlement of labor talks at Delta will have a negative impact on United. Merger arbitrage (see Chapter 9) takes place by short-selling the acquiring firm and buying the target firm. Appendix B: Short Selling Speculative Short Sales Short

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information, 54, 132, 192, 256 insider trading, 145, 159–60 interest rate data, 281–82 international investing sources, 256–57 intraday stock data, 193, 229 merger arbitrage, 228–29 mutual fund information, 38, 76, 101, 132, 228, 257 news services, 76, 228–29 newsletters, 101–2, 160, 228– 29 options markets,

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Masonite International, 60 MCI WorldCom, 198–99 mean reversion, 56 measurement errors, 47 Medtronic, 164, 201 mental accounting, 287, 292, 293. See also behavioral finance merger arbitrage, 196–229 antitrust concerns, 209, 216, 223, 225 arbitrage activity, 209–10 arbitrage spread or speculation spread, 199, 205, 212 bottom line, 228 Canadian merger

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trading, 13 Northrop Grumman, 202, 204 operational efficiency. See market efficiency options call options, 137, 219–20 derivatives, 319–20 hedging, 317n8 Internet references, 54 merger arbitrage, 211, 213 put options, 45–46, 319–20 stock options as compensation, 137 trading costs, 181 weekend effect, 43, 48, 51–52, 53 Outlook,

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Exchange Act (1924), 46 Securities and Exchange Commission (SEC) American depository receipts (ADRs) and, 250– 51 insider trades and, 135, 142, 149 Internet resources, 160 merger arbitrage and, 197 Ownership Reporting System, 138 reporting requirements, 134, 136, 146–47, 149 345 346 Index selection bias, 12 self-attribution, 286 Seyhun, Nejat, 147

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181– 91 weekend effect, 52 mutual funds used in, 320 December effect, 36 industry momentum portfolios, 85–98 international investing and home bias, 251–52 merger arbitrage, 213–15 mutual fund mispricings, 116–29 weekend effect, 51 stock options, 319–20 summarized, xii–xiii trading and transaction costs, 80, 93–95 trading

Money and Power: How Goldman Sachs Came to Rule the World

by William D. Cohan · 11 Apr 2011 · 1,073pp · 302,361 words

forms of arbitrage, including so-called block trading—the buying and selling of large blocks of stock, ideally at a profit—and in so-called merger arbitrage, which as Rohatyn described was the trading in the stocks of companies involved in corporate mergers, generally after the mergers had been announced publicly. Many

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and then the deal failed to close, such a mistake could be devastating financially. But such mishaps were rare, and experts in the art of merger arbitrage did their best to avoid them. Why Cy Lewis would give away one valuable trading idea after another to a competitor—albeit someone who was

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by buying and selling stock in the companies involved in a deal—usually after the deal had been announced publicly. In this new frontier of merger arbitrage—known among arbitrageurs as “event driven” arbitrage—information was power and could mean the difference between making a lot of money or losing a lot

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happen!” While the loss had been sizable, Levy and Tenenbaum also knew that it was in the nature of the bets Goldman was making in merger arbitrage. Occasionally deals would fall apart and the bets would go awry but the odds—at least the way Goldman was calculating them—favored the firm

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the firm needed a savior. A quick call was placed to Warren Buffett to see if he would buy LTCM’s $5 billion portfolio of merger arbitrage positions. Buffett declined. After Corzine got the call from Meriwether, he called back and warned him, “We aren’t getting adequate feedback. It could hurt

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Bank, 16.1, 16.2 Menschel, Bob Menschel, Richard, 7.1, 7.2 Merchant Banker, The (Wechsberg), 9.1 Merck Merck, George Mercy, Eugene, Jr. merger arbitrage, 5.1, 5.2, 9.1 Merger Mania, 11.1 mergers and acquisitions (M&A), 3.1, 5.1, 7.1, 11.1, 11.2

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, 17.1, 21.1 Rogers, John W., Jr. Rogers, Will Rohatyn, Felix, 3.1, 6.1, 8.1, 9.1, 10.1, 15.1 on merger arbitrage on risk arbitrage Sumitomo deal and Rolling Stone, prl.1, 21.1, 21.2, 24.1 Romano, Benito, 11.1, 11.2 Roosevelt, Eleanor Roosevelt

Hedge Fund Market Wizards

by Jack D. Schwager · 24 Apr 2012 · 272pp · 19,172 words

only analyst in a startup firm. I thought I could learn a lot. Wasn’t the fact that you had no experience at all in merger arbitrage an impediment to getting the job? Well, at $22,000, they clearly weren’t willing to spend much money and weren’t looking for an

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go to Wall Street because the market hadn’t gone up for 13 years. What were your experiences in your first job? At the time, merger arbitrage was the Wild West. There were great inefficiencies and plenty of opportunities, so that even a pedestrian year might be a 60 percent to 80

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percent return. Was this just doing plain vanilla merger arbitrage? We did do straight risk arbitrage, and there were wide spreads available. But I was never that attracted to the risk/reward in risk arbitrage

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Mai, Jamie Brazilian interest-rate trade investment strategy pillars subprime mortgages/bonds Manager selection Manalapan Oracle Capital Management Market behavior Marriott Mean reversion Measurement Specialties Merger arbitrage Micron Technology Milken, Michael Mistakes, learning from Mobius, Mark Monthly returns Mortgage-backed securities (MBSs). See also Subprime mortgages/bonds Moscowitz, Eva Net exposure indicator

Finding Alphas: A Quantitative Approach to Building Trading Strategies

by Igor Tulchinsky · 30 Sep 2019 · 321pp

most popular event-driven strategies include actions taken in response to corporate actions: •• Mergers and acquisitions, which give rise to a trading strategy known as merger arbitrage or risk arbitrage. •• Spin-offs, split-offs, and carve-outs. •• Distressed securities. •• Index rebalancing. •• Capital restructuring events, such as share buybacks, debt exchanges, and security

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phase of the business and economic cycle, companies are pursuing ways to unlock shareholder value, so there is always some type of corporate event happening. Merger arbitrage events are quite frequent when the economy expands, for example, and distressed-strategy events are more common when the economy contracts. Figure 25.1 lists

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corporate events that are more frequent in various phases of the business cycle. MERGER ARBITRAGE Merger, or risk, arbitrage is probably the best-known event-driven investment strategy. In a merger, two companies mutually agree to join together, which often

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(the acquirer) and seller (the target). Often, M&A begins as an acquisition, perhaps unfriendly, but eventually the target succumbs and agrees to a merger. Merger arbitrage is a bet that the deal will or will not close. Some of the major reasons companies make acquisitions are listed in Table 25.1

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. 198 Finding Alphas Since hedge funds began to proliferate in the 1990s, merger arbitrage has been a classic market-neutral strategy. However, the activity goes back to the 1940s, when Gustave Levy created the first arbitrage desk on Wall

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Daniel Och, Richard Perry, and Tom Steyer, who came out of its risk arbitrage group in the 1980s to start their own firms. In fact, merger arbitrage was never more powerful than during the buyout boom of the 1980s, when arbitrageurs provided the leverage in many of that era’s hostile deals

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. The merger arbitrage process typically begins when the acquirer approaches the target company with the proposal of a merger or acquisition. This discussion happens at the board of

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of a market decline, the acquirer may believe it is overpaying for the stock and the deal may not go through at the original price. Merger arbitrage strategies are generally uncorrelated to market movements, but they are not immune to market risk. The returns on M&A strategies are uncorrelated during bull

More Money Than God: Hedge Funds and the Making of a New Elite

by Sebastian Mallaby · 9 Jun 2010 · 584pp · 187,436 words

objective was simply to extract fees from the clients. After a stint at Stanford’s business school, Steyer had worked at Goldman Sachs for the merger-arbitrage unit run by Robert Rubin, the future Treasury secretary. This suited him better: Goldman got paid in this business only when Goldman was right, though

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forth about the scientific product they called alpha. The great thing about alpha was that it could be explained: Strategies such as Tom Steyer’s merger arbitrage or D. E. Shaw’s statistical arbitrage delivered uncorrelated, market-beating profits in a way that could be understood, replicated, and manufactured by professionals. And

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the very model of the modern alpha factory. Its founder, Nick Maounis, was a convertible-arbitrage specialist by background, but he had hired experts in merger arbitrage, long/short equity investing, credit arbitrage, and statistical arbitrage; and in 2002, following the collapse of the corrupt energy company Enron, Maounis had snapped up

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was a point of pride. In the first months after Amaranth’s launch in September 2000, nearly half of its capital had been focused on merger arbitrage. A year later, that strategy had been cut to practically zero, and more than half of Amaranth’s capital was focused on convertible arbitrage. Scroll

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road as a boutique-hedge-fund manager, he had honed the art of the unconventional long shot. He specialized, for example, in a form of merger arbitrage that focused on long odds: As well as investing in mergers that were expected to be consummated and collecting a modest premium, Paulson sometimes bet

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saying the deal’s about to break?” (Meridee Moore, interview with the author, July 24, 2008.) 8. Meridee Moore emphasizes the similarity in approach between merger arbitrage and distressed-debt investments. In bankruptcy, distressed debt is often converted into equity, and the payoff from that conversion is akin to the payoff from

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation

by Richard Bookstaber · 5 Apr 2007 · 289pp · 113,211 words

1987, it was hard to see anything out of the ordinary. There were a few negative statements coming out of Washington and some difficulties with merger arbitrage transactions—traders who play the market by guessing about future corporate takeovers. What else is new? The trigger for the LTCM crisis was something as

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directional/tactical. Each of these styles has three strategic subsets. Arbitrage consists of equity market neutral, fixed income arbitrage, and convertible arbitrage; event-driven has merger arbitrage, distressed, and special situations; directional/tactical has long/short equity, managed futures, and macro. The problem with this sort of classification, based as it is

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specifics of the investment process or strategy. For example, in the neutral classification there is relative value and statistical arbitrage; the event classification would include merger arbitrage, credit arbitrage, and distressed debt. Investment type is the one component of the analysis that will vary over time with the introduction of new investment

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: A Manager’s Perspective”; “Macro Trading and Investment Strategies”; “Commodity Trading Advisor Survey”; “Stock Selection in Eastern European Markets”; “Market Neutral versus Long/Short Equity”; “Merger Arbitrage: Evidence of Profitability”; “Analysis of Real Estate Investments in the U.S.”; “Benefits of International Small Cap Stocks.” What is the common ground, other than

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tightly controlled to maintain market neutrality. On the other extreme are the strategies driven by market or economic events. These would include distressed debt and merger arbitrage, as well as opportunistic emerging market funds—funds that trade in countries that are on the precipice of crisis. Related to the diverse sources of

The Snowball: Warren Buffett and the Business of Life

by Alice Schroeder · 1 Sep 2008 · 1,336pp · 415,037 words

what went wrong. Buffett liked Rosenfeld. Now he had been deputized by Meriwether to cut back the portfolio’s size by selling the firm’s merger arbitrage positions. “I hadn’t heard from him for years. With fear in his voice, Eric started to talk about me taking out their whole big

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businesses fueled by an insurance company that also owned some stocks, not a quasi-mutual fund. 21. Roger Lowenstein, When Genius Failed. 22. Stock or merger arbitrage is a bet on whether a merger will close. Merger-arb specialists talk to lawyers and investment bankers and specialize in scuttlebutt. Their bets are

Market Sense and Nonsense

by Jack D. Schwager · 5 Oct 2012 · 297pp · 91,141 words

Index 6 HFRI Equity Hedge: Short Bias Index 7 HFRI Event-Driven (Total) Index 8 HFRI Event-Driven: Distressed/Restructuring Index 9 HFRI Event-Driven: Merger Arbitrage Index 10 HFRI Event-Driven: Private Issue/Regulation D Index 11 HFRI Macro (Total) Index 12 HFRI Macro: Systematic Diversified Index 13 HFRI Relative Value

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particularly dominant in some hedge fund strategy styles. We now look at two hedge fund strategies to illustrate the impact of strategy category on performance: Merger arbitrage. When a merger deal is announced, the target company’s stock price will jump to some level below the announced acquisition price. The discount exists

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completed. This discount will diminish over time as the likelihood of a successful transaction increases, and will approach zero if the merger is successfully completed. Merger arbitrage funds seek to profit by buying shares in the target company (and hedging with sales of the acquiring company if the merger deal is a

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stock exchange at a specified ratio rather than cash acquisition). Merger arbitrage funds will profit from the closing of the discount if the deal is completed and will minimize losses to the extent they are able to

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avoid deals that break. Merger arbitrage funds are highly dependent on the level of merger activity and the level of discounts. When there is a sharp expansion in merger activity, such

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as occurred in 1999–2000 and 2006, merger arbitrage funds will do well. However, periods of depressed merger activity, such as 2001 to 2005, will be accompanied by low or negative returns. The level

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of returns of any merger arbitrage fund is more likely to be a reflection of the level of past merger activity than of manager skill, and there is no reason to

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merger activity. On the contrary, the cyclical tendency in mergers may even suggest that the conditions in recent years—and by implication the level of merger arbitrage returns in recent years—are an inverse indicator. Convertible arbitrage. A convertible bond is a corporate bond that holders can convert into a fixed number

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nothing about the skill level of the managers and would have served as an extraordinarily poor indication of future performance. Similar to the situation for merger arbitrage and convertible arbitrage, the investment environment for the specific strategy plays a critical role in determining returns for managers in many other hedge fund categories

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(i.e., equity hedge, market neutral, long bias, short bias, and sector), there is a broad range of other hedge fund strategy categories. These include: Merger arbitrage. In a merger, the acquiring company will pay for the acquired company stock either with cash or in a fixed-ratio exchange for its own

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acquiring company’s stock in a stock exchange acquisition. The discount exists because there is some uncertainty as to whether the merger will be completed. Merger arbitrage funds will seek to profit by buying the acquired company’s stock in a cash acquisition or buying the acquired company’s stock and selling

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strategy is that if the deal breaks, the resulting loss can be many multiples of the discount that would have been earned. To be successful, merger arbitrage managers need to have the expertise and skill to select those mergers that will end up being completed. Some

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merger arbitrage managers will also occasionally seek to profit by doing a reverse merger arbitrage trade on announced mergers they believe will fail to be successfully concluded. Convertible arbitrage. Convertible bonds are corporate bonds that pay

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, restructurings, and bankruptcies. The investment domain of event driven funds includes the same trading opportunities covered by two of the aforementioned hedge fund strategy groups—merger arbitrage and distressed—as well as trades related to corporate events other than mergers and bankruptcies. Emerging markets. The unifying theme of funds in this category

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portfolio Illiquid trades Illiquidity risk Incentive fees Index funds Indicators contrarian credit quality of differentiation of diversification of future performance futures market as interest rates merger arbitrage past as past returns return levels risk volatility Inflation Information availability efficient use of Initial public offerings (IPO) Insider trading Institutional investors Interest rates Internet

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funds market dependency past and future correlation performance impact by strategy Market timing skill Market-based risk Maximum drawdown (MDD) Mean reversion Mean-reversion strategy Merger arbitrage funds Mergers, cyclical tendency Metrics Minimum acceptable return (MAR) ratio and Calmar ratio Mispricing Mocking Monetary policy Mortgage standards Mortgage-backed securities (MBSs) Mortgages Multifund

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term investment S&P performance Return retracement ratio (RRR) Return/risk performance Return/risk ratios vs. return Returns comparison measures relative vs. absolute objective Reverse merger arbitrage Risk assessment of for best strategy and leverage measurement vs. failure to measure measures of perception of vs. volatility Risk assessment Risk aversion Risk evaluation

The New Science of Asset Allocation: Risk Management in a Multi-Asset World

by Thomas Schneeweis, Garry B. Crowder and Hossein Kazemi · 8 Mar 2010 · 317pp · 106,130 words

0.40 0.30 0.20 0.10 — CISDM Equity Long/Short Index CISDM Equity Market Neutral Index CISDM Event Driven Multi-Strategy Index CISDM Merger Arbitrage Index CISDM Fund of Funds Index Mutual Fd Eq Long Short Mutual Fd Market Neutral Mutual Fd Event Driven Mutual Fd Merger Arb Mutual Fd

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in assets. Hedge fund strategies generally fall under three primary groupings: 1. Relative value (equity market neutral, fixed income arbitrage, convertible arbitrage) 2. Event driven (merger arbitrage, distressed securities, event multistrategy) 3. Opportunistic (equity long short, global macro) Sources of Hedge Fund Return The sources of hedge fund returns are often described

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Strategy Indices (2001−2008) Annualized Return CISDM Equity Market Neutral CISDM Fixed Income Arbitrage CISDM Convertible Arbitrage CISDM Distressed Securities CISDM Event Driven MultiStrategy CISDM Merger Arbitrage CISDM Emerging Markets CISDM Equity Long/Short CISDM Global Macro S&P 500 BarCap US Gov BarCap US Corporate High-Yield 142 Standard Deviation Correlation

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exposed to similar risks should have higher correlations (equity long short and emerging markets) than strategies which trade in fundamentally different markets (global macro and merger arbitrage). Hedge Fund Performance in Down and Up Equity Markets Exhibit 7.8 depicts the performance of various hedge fund strategies in months in which the

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Fund Strategy Correlations (2001–2008) CISDM Equity Market Neutral CISDM Fixed Income Arbitrage CISDM Convertible Arbitrage CISDM Distressed Securities CISDM Event Driven Multi-Strategy CISDM Merger Arbitrage CISDM Emerging Markets CISDM Equity Long/Short CISDM Global Macro EXHIBIT 7.7 0.47 0.89 0.86 0.82 1.00 0.90

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.73 0.68 Event Driven Multi-Strategy 0.45 0.79 0.65 1.00 0.82 0.68 0.56 0.50 0.61 Merger Arbitrage 0.47 0.83 1.00 0.65 0.86 0.83 0.69 0.74 0.65 Emerging Markets 0.60 1.00 0

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.00% – 3.00% – 4.00% – 5.00% – 6.00% EXHIBIT 7.8 Average Monthly Return CISDM Distressed Securities CISDM Emerging Markets CISDM Convertible Arbitrage CISDM Merger Arbitrage CISDM Hedge Fund Strategy Returns Ranked by S&P 500 (2001–2008) CISDM Global Macro CISDM Equity Market Neutral Middle 32 Months S&P 500

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/Tremont Convertible Arbitrage HFRI Convertible Arbitrage Barclays Event Driven CISDM Event Driven Multi-Strategy CSFB/Tremont Event Driven HFRI Event Driven Barclays Merger Arbitrage CISDM Merger Arbitrage CSFB/Tremont Risk Arbitrage HFRI Merger Arbitrage Barclays Distressed Securities CISDM Distressed Securities CSFB/Tremont Distressed HFRI Distressed Securities Barclays Equity Long Short CISDM Equity Long/Short CSFB/Tremont

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HFRX Equity Market Neutral CISDM Convertible Arbitrage HFRX Convertible Arbitrage CISDM Distressed Securities HFRX Distressed Securities CISDM Event Driven Multi-Strategy HFRX Event Driven CISDM Merger Arbitrage HFRX Merger Arbitrage CISDM Equity Long/Short HFRX Equity Hedge 7.2% 6.6% 2.2% 3.4% 7.4% 18.2% 6.8% 8.2% 6

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-offs, industry consolidations, reorganizations, bankruptcies, mergers and acquisitions, recapitalizations, share buybacks, and other corporate transactions. CASAM/CISDM Merger Arbitrage Index (CISDM Merger Arbitrage): The median performance of merger arbitrage managers reporting to the CASAM/CISDM Hedge Fund Database. Merger arbitrage represents strategies that concentrate on companies that are the subject of a merger, tender offer, or exchange offer

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. While there are a number of different trading based approaches, merger arbitrage strategies often take a long position in the acquired company and a short position in the acquiring company. CASAM/CISDM Emerging Markets Index (CISDM Emerging

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street

by William D. Cohan · 15 Nov 2009 · 620pp · 214,639 words

consolidated his power at the firm, Lewis needed an encore. Bear Stearns did, too. So the partners focused on other event-driven deals, such as merger arbitrage (betting on whether an announced merger would happen or not) and taking controlling equity stakes in companies. In effect, after World War II, Bear Stearns

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he described as “can't lose.” The problem was that Steinberg had reached the limit of the capital the firm had allocated to him for merger arbitrage investments. Greenberg would have to sign off on increasing that limit. Alan Schwartz, then head of the firm's small investment banking department, volunteered to

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day at the firm—even before he had made it to his office—came when Barry Cohen called his cell phone. Cohen had run the merger arbitrage fund at the firm for many years and made himself and his partners a bunch of money. Cohen had also been a protege of Bobby

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in his late seventies, he still had his seat on the executve committee, the board of directors, and the risk committee, but his focus, once merger arbitrage, had shifted to investing his clients' money as well as his own. Besides, Cayne was not exactly open to his rival's views by the