Hedge funds specialising in merger arbitrage have roared back to life in 2025, pocketing gains from a spate of high-profile deal closures — but with fresh capital and dwindling opportunities, the strategy now faces a waiting game for the next wave of mega-mergers, according to a report by Bloomberg.
Billions in profits have flowed to funds including Dan Loeb’s Third Point LLC and Pentwater Capital Management, as long-delayed deals including Nippon Steel’s takeover of United States Steel and Capital One’s acquisition of Discover finally crossed the finish line. The strategy, once a laggard, is now among the top-performing hedge fund styles in 2025, with average gains of 3.4% through May, according to Bloomberg data.
At Water Island Capital, Arbitrage Fund manager Matthew Osowiecki described this year’s deal closures as a “laundry list of monster deals” that were either initiated under Biden or carried through under Trump’s regulatory shift.
The renewed M&A appetite follows the Trump administration’s return to power, which has brought a more predictable and deal-friendly antitrust climate. Regulators have shown a greater willingness to accept structural remedies to green-light mergers – a departure from the litigation-heavy posture of previous years.
Yet the surge in deal completions is exposing a new problem for hedge funds: too few fresh targets. Second-quarter M&A involving US public companies fell 37% year-over-year, with only $85bn in new deals announced, according to Bloomberg.
Recent notable deals — such as Merck’s $10bn acquisition of Verona Pharma and CoreWeave’s $9bn bid for Core Scientific — suggest the pipeline is beginning to stir, although complications around stock structures have made some names difficult to trade for merger arbs.
A Bloomberg survey of 16 hedge fund managers and analysts focused on event-driven strategies highlighted growing optimism. Over half of respondents expect deal flow to increase in the second half of 2025, with Papa John’s and Forward Air emerging as top targets for Q3.
