A resurgence in US dealmaking and increasingly complex regulatory reviews are creating lucrative opportunities for merger arbitrage hedge funds, with managers generating outsized returns by correctly assessing the prospects of controversial transactions.

According to research from Davidson Kempner, deals facing antitrust, national security or political scrutiny have offered a premium roughly 60% higher than simpler transactions over the past five years, up significantly from the previous five-year period. The wider spreads have increased potential returns for merger arbitrage investors since 2021.

The opportunity set has expanded as megadeals account for a growing share of global M&A activity. Merger arbitrage funds typically buy shares in takeover targets trading below the agreed offer price, seeking to capture the spread once a deal closes.

High-profile transactions, including Electronic Arts' $55 billion leveraged buyout and Paramount's proposed $111 billion acquisition of Warner Bros Discovery, have become key tests for the strategy, with outcomes dependent on approvals from multiple regulators across jurisdictions.

While the Trump administration's more permissive stance on antitrust enforcement has encouraged dealmaking, investors say the approval process has become increasingly unpredictable. State attorneys-general, foreign investment reviews and political considerations have added new layers of complexity, requiring funds to assess not only legal and regulatory risks but also buyer commitment and willingness to endure lengthy approval processes.

For merger arbitrage managers, the combination of a booming deal environment and heightened regulatory uncertainty is creating one of the most attractive backdrops for the strategy in years.