Wall Street Journal | How Investors Can Cash In on the M&A Boom
As 2018 looks to be a big one for mergers and acquisitions, individual investors have more ways than ever to bet on the boom—thanks to a handful of mutual funds and two exchange-traded funds focused on merger arbitrage.
A strategy once reserved mainly for hedge funds and professional investors, merger arbitrage typically involves buying the stock of an announced acquisition target, betting the deal will close and the shares will rise, and sometimes shorting the acquirer’s stock on the bet it will fall. The main risk is that the deal might fall apart.
Betting on mergers and acquisitions may sound like a high-risk proposition, but the funds and ETFs that engage in the strategy generally make small bets on lots of deals with the aim of delivering steady annualized returns—generally in the 3% to 5% range—in exchange for less risk than one might expect with stock investing.
Some fund managers say interest in these investments is growing amid a resurgence in M&A activity. Some $2.6 trillion in deals have been announced globally this year through July, up 43% from the year-earlier period, according to data from Dealogic, with U.S. deal volume alone up 47%. At that pace, M&A activity could come close to or top the record $4.38 trillion in global deals announced in 2007.
“There have been a lot of deals—small, medium, and large—that have been announced in the last month or so and we expect the pace to continue,” says Jonathan Lamensdorf, portfolio manager of Highland Capital’s $38.5 million Merger Arbitrage Fund (HMEAX). “Getting more certainty around tax reform and deals like AT&T Time Warner has been favorable to the market,” he says, referring to a recent court ruling that allowed AT&T Inc. to proceed with its $80 billion-plus purchase of Time Warner Inc. despite an effort by U.S. regulators to block it…
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