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Alternative Market Briefing

Merger arbitrage hedge funds show remarkable resilience despite global volatility

Thursday, March 12, 2020

Laxman Pai, Opalesque Asia:

Merger arbitrage is proving the most resilient hedge fund strategy amid the continued global volatility sparked by the coronavirus outbreak, said Lyxor in its weekly brief.

"The ability of the strategy to protect capital in bad times is something we underlined in the past and which is based on historical evidence. This contributes towards explaining why we have been and remain highly constructive on the strategy (at Overweight)," it said.

According to Lyxor Asset Management, Merger Arbitrage is a strategy that has historically been resilient in bad times, when risk assets sold off severely.

During the Global Financial Crisis in 2008, the strategy was down less than -5% while the MSCI World was down almost -50% (from October '07 to March '09). Such a pattern is also observable between 2000 and 2003. During this period, Merger Arbitrage was up +15% when the MSCI World was down -45%.

How can analysts explain such resilience? First, Merger Arbitrage is a low beta strategy. Over the past twenty years, Lyxor estimates its beta versus the MSCI World at below 15% (based on HFRI). It is thus structurally somewhat isolated from wider market moves.

Second, Merger Arbitrage is an active strategy. Under such circumstances, managers have reduced the duration of the portfolio and concentrated it on high conviction deals.

Since February 18th, the equity market peak, Merger Arbitrage is down -0.4%, while a 50/50 portfolio o......................

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