Navigating 2024’s landscape: An Update on Merger Arbitrage
While it remains premature to declare victory on antitrust issues, the combination of positive regulatory shifts and attractive spreads presents a compelling opportunity for merger arbitrage investors. In our view, the landscape for merger arbitrage has continued to evolve favourably. Building on this momentum, we believe that now is a great time to provide an update on the key factors that may influence merger arbitrage strategy in 2024 and share our thoughts on what investors can expect.
In the latter half of 2023, we saw a series of encouraging antitrust developments, marking a pivotal shift in regulatory sentiment. Figure 1 shows the list of merger and acquisition (M&A) market opportunities around mid-2023, all of which have successfully closed at this point, demonstrating the tangible impact of positive regulatory developments.
It appears that the Department of Justice (DOJ) and Federal Trade Commission (FTC) are now adopting a more tempered approach in their rulings. If this trend continues, it could create a more conducive environment for the M&A market.
When it comes to merger arbitrage, there are usually two main factors that determine potential returns: the risk-free rate and the merger arbitrage spread. As shown in Figure 2, the median annualized gross return profile stands at about 10% for the current set of M&A opportunities in the market. With interest rates around 5% level, this is equivalent to approximately 500 basis points of merger arbitrage spreads.
With lower perceived antitrust concerns, we believe the current crop of arbitrage spreads presents an attractive total return potential.
M&A deal volumes are influenced by a multitude of factors, including the economy, elections, and global tensions. While the future is highly uncertain for these known unknowns, it is important to recognize that historically, merger arbitrage returns have exhibited minimal correlation with M&A deal volumes. Our Picton Mahoney Fortified Arbitrage Alternative Fund has consistently delivered positive average returns across various macroeconomic scenarios, as illustrated in Figure 3.
Ultimately, our goal is to offer an all-weather strategy that may provide insulation for investors from the impact of these unpredictable forces.
Predicting macroeconomic trends has proven challenging in recent years, and riding the rollercoaster of market fluctuations can feel like walking a tightrope. Incorporating alpha-focused strategies with alternative return sources in your portfolio can be a safety net under that rope. This means you don’t have to predict the future macro environment accurately to make money. Our track record demonstrates our ability to mitigate market volatility while safeguarding capital during market downturns.
As a reminder, the strategy aims for idiosyncratic returns through deal-specific alpha, serving as a portfolio diversifier with low correlation to traditional assets.
This material has been published by Picton Mahoney Asset Management (“PMAM”) on April 1, 2024
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