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Laxman Pai, Opalesque Asia:

Merger Arbitrage, a defensive strategy within the universe of hedge funds, lagged behind for the first half of 2019 after having delivered upbeat returns in 2018 in relative terms.

In the first half of 2019, Merger Arbitrage lagged behind for three main reasons. First from a macro perspective, a market driven by central bank dovish announcements is a beta-driven rally. In this context, you cannot expect low beta strategies such as Merger Arbitrage and Market Neutral L/S to join the party.

Second, from a fundamental perspective, Merger Arbitrage suffered from tight deal spreads at the beginning of the year. They were caused by lower M&A volumes globally, particularly in Europe and in China.

In the U.S., volumes remained strong, but the number of deals has shrunk. U.S. cross border deals have also collapsed to multi-year lows on the back of higher political uncertainty (trade tensions, Brexit). As a result, low deal supply confronting high demand coming from both generalist and specialist investors caused crowdedness and spread tightening.

Third, the spread widening in May and June, partly related to new deal announcements and renewed trade tensions, caused mark-to-market losses.

Going forward, the combination of stronger CEO confidence in 2019, lower financing costs, and record levels of private equity dry powder may lead to a supportive environment. M&A volumes rebounded and deal spreads have widened since early May, prov......................

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