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Alternative Market Briefing

Merger Arbitrage demonstrates its ability to deliver positive returns in adverse conditions: Lyxor

Wednesday, May 15, 2019

Laxman Pai, Opalesque Asia:

Merger Arbitrage again demonstrated its ability to deliver positive returns in adverse conditions, Lyxor said in its weekly brief.

"This is a strategy on which we have maintained an Overweight stance over the recent quarters despite the recent underperformance," it said in a report.

M&A volumes remained strong in the U.S. in April and rebounded in Europe. Deal spreads are tight, and this is a headwind. However, the strategy is so defensive and uncorrelated with broader market movements that we strongly reaffirm the Overweight stance.

CTAs benefitted from their long fixed income positioning which helped protect portfolios. Meanwhile, L/S Credit was flat, and Merger Arbitrage managed to deliver positive returns (+0.1%).

The worst performing alternative strategy among the 240 that is monitored in this report was a Global Macro, down -3.1%.

"Going forward, the financial environment is increasingly uncertain. After the year-to-date rally in risk assets, we believe that the trade war escalation between the U.S. and China is a valid reason to take profits and reduce risk in portfolios," Lyxor said.

"We also believe that both countries will eventually find an agreement, but such agreement could take place after intense market pressure. Under such conditions, Merger Arbitrage is expected to do well. Finally, the associated fall in bond yields also supports our preference for carry strategies such as L/S Credit and EM-focused Glo......................

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