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Weekly Brief: Merger arbitrage cheers M&A spree

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The current year is on track to be the best year for M&A ever. Since the beginning of the year, global M&A volumes have reached USD1800bn according to Bloomberg, the best first five months in twenty years. Such figures include announced, pending and completed deals and are thus subject to revisions. Overall, US deals dominate, accounting for 45 per cent of M&A activity year to date and in terms of sectors, health care is leading, followed by financials and communications.


Philippe Ferreira

Head of Research – Managed Account Platform

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The current year is on track to be the best year for M&A ever. Since the beginning of the year, global M&A volumes have reached USD1800bn according to Bloomberg, the best first five months in twenty years. Such figures include announced, pending and completed deals and are thus subject to revisions. Overall, US deals dominate, accounting for 45 per cent of M&A activity year to date and in terms of sectors, health care is leading, followed by financials and communications.

Last week, Charter formally announced the USD79 billion acquisition of Time Warner Cable, which remains subject to regulatory approval. The stock price of the target has rallied over the recent weeks, and has supported merger arbitrage players which have sizeable exposures to the deal. The deal was the strongest contributor to the performance of the strategy last week. Prior to that, the flurry of mega mergers in the pharma sector (Teva vs Mylan vs Perrigo, Actavis vs Allergan, Abbvie vs Pharmacyclics, Valeant vs Salix) has fuelled the performance of merger arbitrageurs. In May, the Lyxor Merger Arbitrage index is up 1.5 per cent and is one of the best performing strategies year-to-date at +4.7 per cent.

As the month of May comes to an end, we note that hedge funds continued to deliver positive returns. The Lyxor Hedge Fund index (HFI) is up 0.4 per cent in May (4 per cent year to date), with all strategies, except CTAs, posting gains. The CTA drawdown is now over as market conditions have normalised. As a result, we closed our preference for short term models versus long term CTAs which has provided protection as the trend reversals unfolded in early May. We now favour medium term models as we believe it is too early to jump into long term CTAs right now. Meanwhile, we maintain our slight overweight stance on Event-Driven and turn cautious on long biased Asian L/S Equity as the Chinese stock market rally reverses. Within the Asian L/S Equity space, we have a preference for Market Neutral managers. Finally, we believe the higher volatility regime in fixed income is here to stay and we maintain our positive stance on sovereign fixed income arbitrage funds.

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