01.17.2012
By Terry Flanagan

Buy Side Favors Merger Arb

Investors’ renewed desire for aggressive, alpha-oriented alternative strategies align the stars for merger arbitrage strategies.

PineBridge Investments, most known for providing cross-asset class, alternative strategies to a broad range of investors, has announced the launch of its Merger Arbitrage Fund.

The fund, which has about five million in fee capital, will take what’s been a primarily an institutional fund and make it available to retail investors.

“We have offered the merger arbitrage strategy for mainly institutions through separate managed accounts since 2002,” said Lan Cai, managing director at PineBridge. “But due to recent uncertainty that stemmed from the financial crisis, retail investors have shown interest in the strategy.”

“They’ve shown interest in more aggressive, alpha based strategies. Investors are exhausted after the roller coaster ride they’ve experienced in both the equity and bond markets… they’re looking for compounding, uncorrelated returns,” Cai told Markets Media.
Merger arbitrage typically exploits profits to be gained from two merging companies, by simultaneously buying and selling the companies’ stocks. Uncorrelated returns are a primary draw for investors. PineBridge, with nearly 70 billion under management, has held over a nine year track record of uncorrelated returns.

According to the firm, the new mutual fund’s strategy will be “generally market neutral, and continue to seek low correlation with equity and bond markets, meanwhile, offering investors the potential opportunity to achieve returns with relatively low volatility.”
Apart from its newly formed mutual fund form, PineBridge’s merger arbitrage strategy has been offered as UCITS (Undertaking for the Collective Investment of Transferable Securities) vehicle to global investors.

Naturally, the performance of merger arbitrage will depend on the state of global merger activity, which is expected to be on an upward trend, according to Cai.

“Merger activity has picked up since 2009,” she said. “We are at the beginning of the upward trend. Apart from the geopolitical crisis in Europe, 2012 should be a good year for mergers, which typically lags the economy.”
Deal activity has indeed been on the rise. Last year, market participants experienced an increase in deal volume with over 9,400 announced cross-border deals worth roughly $1 trillion. This was a 5.5% increase from the $945 billion announced in 2010.

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