With hedge funds losing money and bleeding assets, a handful of firms and clients are pinning their hopes on corporate marriages -- just as the best returns might be behind them.
Billionaire John Paulson’s Paulson & Co., Manikay Partners, a $1.9 billion firm led by Shane Finemore, and Arrowgrass Capital Partners have all raised new funds to speculate on corporate mergers, saying the return expectations are higher than they’ve been for years, according to people familiar with the firms. Multistrategy firms like Taconic Capital Advisors, Farallon Capital Management and Och-Ziff Capital Management LLC have also increased their allocation to mergers.
Merger arbitrage strategies, which generally bet that a target company’s shares will climb toward the offer price and the bidder’s will fall, are among the best performers this year, returning 1.3% in the first quarter, while the industry overall is slightly down. Yet returns may falter if merger activity slows.
“The opportunity set is good, but it’s not this massive, juicy pile of money waiting to be scooped up," said Paul Glazer, whose nearly $1 billion Glazer Capital Management has been investing in the strategy since 1999. His main fund rose almost 3% this year through April 14 after gaining almost 12% last year. “Most strategies have done so poorly, and merger arbitrage really shines in comparison in times of distress like we’ve been experiencing," Glazer said.
Spokespeople for the firms declined to comment for this story.
The number of announced mergers jumped last year by about 50%, and that’s a big reason the returns have been higher than normal. There is currently $50 billion to $60 billion of “spread” -- the difference between where stocks of companies in announced mergers are trading now and the final transaction price -- in deals globally, one merger-arb trader estimates. That compares with historical levels of $10 billion to $15 billion.