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Merger arbitrage ETFs attracting new assets, says Markit

The recent flurry of merger and acquisition (M&A) activity has seen a resurgence of deal arbitrage, with merger arbitrage ETFs attracting new assets despite the strategy not performing last year, according to research by Markit.

Global deals announced in the first quarter were up 54 per cent from the same period last year according to Thomson Reuters.
The deal momentum continued in April with the global year to date deals announced topping USD1.1 trillion.
The previous deal drought which, saw many hedge funds turn their back on merger arb, also saw large outflows out of merger arb products. The outflow out of the asset class saw assets under management fall by nearly 40 per cent from their peak at the end of 2011.
The recent flurry of activity has seen the four listed ETPs which aim to play merger arbitrage strategies snap a seven quarter net outflow streak. The first quarter of the year saw USD6.4m of inflows. This positive mood continued in April when the four funds managed to pull in nearly USD4m of new assets.
While assets managed by merger arbitrage ETPs are still relatively low (around USD100m), their returns can be used to gauge the efficacy of the strategy.
In 2013 the two largest funds, the Credit Suisse Merger Arbitrage Liquid Index and the Index IQ ARB Merger Arbitrage ETF returned 7.9 per cent and 6.5 per cent, respectively, well below the returns posted by passive index funds.
Year-to-date, the strategy has still to perform as the CSMA down -2.0 per cent, while MNA is up 2.6 per cent. The relative underperformance is not as bad as last year though as the markets have largely traded sideways.

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