Posted by JR on November 06, 2009 at 14:52:45:
In Reply to: The case of arbitrage/merger funds (ARBFX, MERFX) (lip) posted by Fundmentals on November 06, 2009 at 14:29:09:
this is EXACTLY how "exotic" (why the choice of word?) hedge funds called "merger arb" make money! it also includes shorting the acquirer and being long the target and wait for the prices to "merge". you only loose money when the deal is canceled (which actually happens a lot in downturn.) i don't think the true hedge fund would touch this deal though. the fund you invested in seem similar (may be with the slightly lower leverage). from their website, as of 9/30 they were $434mm long and $207mm short, with $11mm in cash. a hedge fund would have a bit more leverage and a different fee structure, such as 1.5% management fee and 15% performance fee with a high watermark (they only collect perf fees if their investors make money). your fund seems to just have 1.88% mgnt fee. i agree that in a steady market, this is a very good strategy. soros's merger arb guys hadn't lost money in 17 years before they left and set up their own boutique. all worked well with steady gains until 2008. a couple of billions are gone now. just another decent strategy, but not remedy for the black swan. : I recently added some allocation to ARBFX and MERFX in my conservative taxable portfolio as low volatility, reasonably (but not entirely) major market uncorrelated funds. : The linked article on the Buffett takeover of Burlington Northern shows how these funds (or funds also using this strategy) make money. : A slow recovery with a raising market is a good environment for a lot of takeovers and mergers as the winners gobble up losers of the recession as organic growth is limited. : These funds are not to be confused with some exotic hedge-fund arbitrage strategy and will not be very flashy but will reduce the volatility of a portfolio (like bond funds) with potential for equity like gains.