Is merger arbitrage a good strategy?
Is merger arbitrage a good strategy?
The simplest type of merger arbitrage involves buying of a company targeted for takeover at a discount from the acquisition price, betting the deal will go through. Merger arbitrage has proven a successful strategy for many funds, but it requires expertise to accurately assess the risks.
What is a merger arbitrage strategy?
Merger arbitrage is a strategy where investors purchase the stock of a company being acquired in an attempt to capture the spread between the current market price and the proposed acquisition terms.
What are the three conditions for arbitrage?
There are three basic conditions under which arbitrage is possible:
- The same asset trades for different prices in different markets.
- Assets with the same cash flows trade for different prices.
- Assets with a known future price trade at a discount today, in relation to the risk-free interest rate.
How do merger arbitrage funds work?
Merger arbitrage hedge funds make investment profits when they successfully anticipate the outcome of an announced merger or acquisition, and capture the spread between the current market price, and the price at which the stock will be trading after the merger is completed.
Is merger arbitrage riskless?
What Is Merger Arbitrage? Merger arbitrage, often considered a hedge fund strategy, involves simultaneously purchasing and selling the respective stock of two merging companies to create “riskless” profits.
Why does merger arbitrage exist?
This spread exists because selling a security at a discount to its deal price provides immediate liquidity to the seller. The spread is compensation to the arbitrageur for taking on risk that the stockholder (who owned the stock prior to deal announcement) no longer wants to bear.
Is arbitrage trading risk free?
Arbitrage can be used whenever any stock, commodity, or currency may be purchased in one market at a given price and simultaneously sold in another market at a higher price. The situation creates an opportunity for a risk-free profit for the trader.