Investors are always looking for ways to diversify their portfolios with alternative assets and investment strategies that have a low correlation to traditional assets such as stocks and bonds, are tax advantaged, and can provide a predictable flow of income.
In today’s increasingly uncertain market environment, the average investor is seeking a solution to the drawbacks of a traditional balanced portfolio. Arbitrage strategies provide low correlation, tax advantages, and income replacement and thus may be a suitable addition to a well-diversified, balanced portfolio.
Benefits of Merger Arbitrage
Market neutral – consistent and steady absolute returns
Low risk – low volatility strategy with low drawdowns
Low correlation – low correlation with equity and bonds
Short duration – average deal duration is 3 to 5 months
Tax efficient – majority of returns are taxed as capital gains
Interest rate hedge – return potential increases with rising rates
A Merger Arbitrage opportunity is a type of investment that seeks to profit from the successful completion or a merger or acquisition by exploiting price discrepancies between the stock prices of the companies involved in such events. The goal of a Merger Arbitrage investment is to capture the difference in price, or spread, from when a merger is announced until it’s completed. Uncertainty can be reduced by investing in definitive agreements, not speculating on an acquisition.
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