The Momentum Group has launched a fund of funds focusing solely on merger arbitrage as part of a str...
The Momentum Group has launched a fund of funds focusing solely on merger arbitrage as part of a strategy to bring funds using alternative investment strategies more into the mainstream.
The Merger Opportunities fund will typically hold four or five funds, and will be chosen only from those funds with which the company has had prior dealings.
Michael Goldman, chief executive of Momentum, said: "No single manager covers all the bases, so in building the Merger Opportunities fund, we have brought together managers who specialise in cross-border, hostile, friendly, larger and smaller corporate events. We know and already invest with each selected manager."
The Bermuda-registered Merger Opportunities fund has a minimum investment of $25,000, with a 1.5% pa management fee and a 10% performance fee, levied only on new performance gains. The fund has been open to investors since the beginning of January and started with a seed capital of around $15m.
Momentum hopes to profit from being able to offer a product that many other fund managers are not allowed to offer, because merger arbitrage requires that the manager goes short.
Merger arbitrage is an event-driven and company-specific strategy. The manager looks out for events like merger proposals, restructuring announcements, the decision to pay preferred dividend arrears and so on.
The managers try to keep this highly systematic investment technique as stable and predictable as possible. They typically will go short on the buyer and long on the target only after the deal is officially announced, which means their fund will gain a predictable amount and can only lose if the deal fails to go through. The average historic growth of the funds available to Merger Opportunities is 15%.
The profit from each deal depends on the disparity between the agreed price and the market value when the deal closes, and this tends to be fairly small. However, the time taken to close a deal is known beforehand and, in any case, tends to be fairly short so many transactions can be made through the year, so the annualised profit can be significant (see table above).
The fund also includes a manager who focuses on the secondary or smaller end of the merger arbitrage spectrum. These mid-sized and smaller deals can trade at wide spreads for no apparent reason.
They are also more straightforward to assess than mega-mergers which may stumble over unexpected regulatory hurdles.
A lot of emphasis is placed on the deal closure schedule. Investment in a deal is limited to 5% of the fund's assets until all potential regulatory hurdles have been passed. As the deal process matures, the manager closely tracks the acquirer's relative value against its peer group.
Goldman hopes advisors will be less nervous of a technique that is commonly thought of as one of the high-risk alternative strategies, because those techniques are not used gratuitously.
He said: "A merger arbitrage fund is a hedge fund by nature - there is not another way to do it."
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