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Tom Sandell, Sandell Asset Management

Tom Sandell explains merger arbitrage strategy for his latest UCITS

Tom Sandell, the New York hedge fund manager whose firm, Sandell Asset Management, has been actively trading in the merger arbitrage space for the last 12 years, spoke this week to Citywire Global on how the strategy works and how it can be applied to a UCITS wrapper. Just last week, Sandell launched the Castlerigg Merger Arbitrage UCITS, which will seek to deliver a similar level of performance to its offshore brother. “You can make money on the premium being paid in a takeover situation,” said Sandell, who explains that merger arbitrage involves going long the target company and if there’s a stock-for-stock deal “you short the bidders stock to lock-in the spread”. The flagship hedge fund currently holds 37 mergers in its portfolio, but Sandell explained that under UCITS regulations the new fund’s portfolio would need to be more diversified, adding the 5/10/40 rule was an unavoidable limitation. “Only 40 per cent of the portfolio can have positions greater than 5 per cent and less than 10 per cent (of the fund’s NAV) whereas the hedge fund has no such limitation,” said Sandell. “It will bring down volatility but won’t necessarily bring down performance.” The deal pipeline has picked up significantly in Q3, Sandell noting that European companies presently had USD1 trillion on their balance sheets and USD2 trillion on those of U.S. companies. “There are opportunities for stronger companies to pick up competitors cheaply,” said Sandell, who recently added McAffee to his flagship’s portfolio following the USD7.7 billion takeover by Intel. “The beauty of merger arbitrage is I don’t have to worry whether the equity markets are up or down every day,” said Sandell.

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