With the World Cup currently going on in South Africa, you can compare investors to those poor guys who stand in the defensive wall at free-kicks: Nervously “cupping their groins,” as my colleague, Alexander Green, put it last week.
I can’t say I blame them. We’ve been in defensive mode ever since the “flash crash” on May 6. And with analysts like David Rosenberg inciting panic by suggesting that a 30% to 40% correction could be in the works, perhaps full-on body armor would be more effective.
But before you rush to liquidate your portfolio and scurry into an all-cash position, consider a great, lesser-known alternative. A safe, tried-and-tested way of earning stock market returns, using merger arbitrage funds…
Mergers & Acquisitions Help Share Prices Surge
Nothing jolts a stock higher than an unsolicited takeover offer. The target company’s share price can surge by 26%… 45%… even 67% in the blink of an eye.
The tricky part, of course, is identifying takeover targets before a deal is announced. Such a strategy is decidedly more speculative and isn’t suitable for investors in self-preservation mode.
So don’t try.
Instead, wait until after the takeover announcements are made public.
Yes, you can actually make money doing that. Good money, in fact, by using a strategy called “merger arbitrage.”
Merger Arbitrage: The Safest Way to Bet on the M&A Market
As I mentioned, once Company A announces plans to buy Company B, the share price of Company B immediately shoots higher. However, it doesn’t go up to the full offer price. Historically, it stops about 3% to 5% shy.
The reason this “spread” exists is straightforward:
It’s the market’s way of pricing the time it will take to complete the deal.It also serves as a risk premium to compensate for the possibility of the deal falling through.[/list]On average, though, only 16% of announced takeover deals fail to close. If you focus on friendly ones (meaning deals welcomed by management), the failure rate drops to roughly 5%.
Put another way, for 95 out of 100 takeovers, the spread is essentially risk-free money waiting to be claimed. All you have to do is buy shares of the target company after a deal is announced… and wait.
Once the deal closes, the cash equivalent to the full offer price will appear in your account. And you’ll have earned the spread in the process. Since the typical merger closes within four months, you can invest in several deals over the course of the year and earn a respectable double-digit return.
Skeptical About Merger Arbitrage? Don’t Be…
If you’ve never heard of merger arbitrage before, you’re probably skeptical at this point. You may even doubt that such a simple, straightforward strategy can work over the long term.
Let me put those fears to bed, once and for all.
Merger arbitrage is a battle-tested strategy. It’s been a mainstay in institutional and high-net-worth portfolios for decades. And that’s because it outperforms stocks and bonds, while taking dramatically less risk. In fact, about two-thirds less risk than investing in stocks, based on standard deviations.
Take Advantage of The Takeover Trend With Merger Arbitrage
Okay, so how do you take advantage of the takeover investing trend?
Don’t worry. This isn’t the part where I tell you to scan the daily headlines for takeover announcements in an effort to identify the best merger arbitrage opportunities. That requires too much time and effort – and I’d never leave you hanging like that.
No… this is the part when I tell you to hire a pro to do the heavy lifting for you. There are two funds with proven M&A track records…
The Merger Fund (MERFX)The Arbitrage Fund (ARBFX) Both are no-load funds with reasonable expenses, run by managers that have invested in merger arbitrage opportunities for over a decade.
And the results speak for themselves…
When disaster struck in 2008, both funds emerged virtually unscathed.
The Merger Fund fell a mere -2.26%.And The Arbitrage Fund lost a scant -0.63%.
You can’t get better downside protection than that, while still staying invested in the market!
And of course, when M&A activity heats up, the funds deliver to the upside, too. When deal volume picked up after the 2003 recession, The Merger Fund jumped 11%, while The Arbitrage Fund jumped 15%.
Bottom line: If you agree that good defense can often be your best offense, don’t have a panic attack and make a hasty decision that undermines your long-term investment goals. Instead, consider merger arbitrage funds.
Good investing,
Louis Basenese
http://www.investmentu.com
I can’t say I blame them. We’ve been in defensive mode ever since the “flash crash” on May 6. And with analysts like David Rosenberg inciting panic by suggesting that a 30% to 40% correction could be in the works, perhaps full-on body armor would be more effective.
But before you rush to liquidate your portfolio and scurry into an all-cash position, consider a great, lesser-known alternative. A safe, tried-and-tested way of earning stock market returns, using merger arbitrage funds…
Mergers & Acquisitions Help Share Prices Surge
Nothing jolts a stock higher than an unsolicited takeover offer. The target company’s share price can surge by 26%… 45%… even 67% in the blink of an eye.
The tricky part, of course, is identifying takeover targets before a deal is announced. Such a strategy is decidedly more speculative and isn’t suitable for investors in self-preservation mode.
So don’t try.
Instead, wait until after the takeover announcements are made public.
Yes, you can actually make money doing that. Good money, in fact, by using a strategy called “merger arbitrage.”
Merger Arbitrage: The Safest Way to Bet on the M&A Market
As I mentioned, once Company A announces plans to buy Company B, the share price of Company B immediately shoots higher. However, it doesn’t go up to the full offer price. Historically, it stops about 3% to 5% shy.
The reason this “spread” exists is straightforward:
It’s the market’s way of pricing the time it will take to complete the deal.It also serves as a risk premium to compensate for the possibility of the deal falling through.[/list]On average, though, only 16% of announced takeover deals fail to close. If you focus on friendly ones (meaning deals welcomed by management), the failure rate drops to roughly 5%.
Put another way, for 95 out of 100 takeovers, the spread is essentially risk-free money waiting to be claimed. All you have to do is buy shares of the target company after a deal is announced… and wait.
Once the deal closes, the cash equivalent to the full offer price will appear in your account. And you’ll have earned the spread in the process. Since the typical merger closes within four months, you can invest in several deals over the course of the year and earn a respectable double-digit return.
Skeptical About Merger Arbitrage? Don’t Be…
If you’ve never heard of merger arbitrage before, you’re probably skeptical at this point. You may even doubt that such a simple, straightforward strategy can work over the long term.
Let me put those fears to bed, once and for all.
Merger arbitrage is a battle-tested strategy. It’s been a mainstay in institutional and high-net-worth portfolios for decades. And that’s because it outperforms stocks and bonds, while taking dramatically less risk. In fact, about two-thirds less risk than investing in stocks, based on standard deviations.
Take Advantage of The Takeover Trend With Merger Arbitrage
Okay, so how do you take advantage of the takeover investing trend?
Don’t worry. This isn’t the part where I tell you to scan the daily headlines for takeover announcements in an effort to identify the best merger arbitrage opportunities. That requires too much time and effort – and I’d never leave you hanging like that.
No… this is the part when I tell you to hire a pro to do the heavy lifting for you. There are two funds with proven M&A track records…
The Merger Fund (MERFX)The Arbitrage Fund (ARBFX) Both are no-load funds with reasonable expenses, run by managers that have invested in merger arbitrage opportunities for over a decade.
And the results speak for themselves…
When disaster struck in 2008, both funds emerged virtually unscathed.
The Merger Fund fell a mere -2.26%.And The Arbitrage Fund lost a scant -0.63%.
You can’t get better downside protection than that, while still staying invested in the market!
And of course, when M&A activity heats up, the funds deliver to the upside, too. When deal volume picked up after the 2003 recession, The Merger Fund jumped 11%, while The Arbitrage Fund jumped 15%.
Bottom line: If you agree that good defense can often be your best offense, don’t have a panic attack and make a hasty decision that undermines your long-term investment goals. Instead, consider merger arbitrage funds.
Good investing,
Louis Basenese
http://www.investmentu.com
