An offshore merger arbitrage product leveraged up to 200% on the long side will launch in August
HSBC is planning a series of initiatives and launches for its alternative investments division. These include reopening the $240m UK market neutral product, run by Peter Harnett, and launching a leveraged version of its Global Merger Arbitrage strategy.
The group already has $230m in a range of merger arbitrage products, but on 1 August it intends to bring out an offshore version leveraged up to 200% on the long side. It is also considering an onshore offering.
In addition, the group is assessing the viability of a version that guarantees initial investment only. Tom Weekley, head of merger arbitrage, said it would need a structure which tied up capital for around five years. The guarantee could cost around 1% a year.
Weekley stressed this idea was only at a project stage and that HSBC felt a leveraged version of its existing merger arbitrage strategy would probably prove the more popular with investors.
The Global Merger Arbitrage fund range, which includes a Cayman Islands version, a US-limited partnership, a Dublin-registered vehicle and one in Japan is run by Weekley, supported by John Moore-Stanley and Peter Campbell.
The team looks for the most attractive merger arbitrage from a worldwide universe, using 120 in-house analysts covering the globe.
Weekley said: 'This is the sole focus. We do not look at bankruptcy positions, convertible bond arbitrage, market direction positions or other add-ons.
'This is an unleveraged portfolio. We seek lower-risk opportunities ' announced, definitive-term, financed deals. We do not actively manage these positions.
'Entities involved in these transactions must have market caps of at least $250m. The fund rarely goes below $1bn and we prefer fully-financed strategic deals where regulatory problems are not anticipated.'
The fund runs 35-50 positions, with none exceeding 10%. Typically, the highest position is 8% and the portfolio can have up to 40% exposure outside the US.
Weekley said this approach produced low-risk, predictable returns. 'The strategy has been run for 19 months and has proved profitable for 17 months,' he said.
He added: 'We were up 12.3% last year with a 2.5% standard deviation, a negative correlation with the market.'
Merger arbitrage provides equity levels of return at around 13.7%pa but with fixed income risk or volatility, according to HSBC. Including leveraged portfolios, the asset class has provided an annualised return over the past 10 years of 13.68%, according to MAR/Hedge, with a standard deviation of 4.96%.
This compares with a return of 6.34% and a standard deviation of 6.99% for a five-year Treasury bond, according to Ibbotson Associates. The company also found that the S&P 500 had produced an annual return of 15.68% but with a standard deviation of 16.25%.
Using this research, Weekley said the historic odds of merger arbitrage beating 5% Libor rose from 81.5% over three months to 99.9% over three years. For five-year Treasuries, it went from 53.8% to 63% and for the S&P 500 it went from 62.9% to 87.3%.
The group is positive on the outlook for merger arbitrage. Weekley said deal flows continue to be adequate in North America and are increasing internationally. He believes many of these to be strategic mergers rather than conditioned by financing requirements.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till