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Merger Arbitrage in a Rising-Rate Environment

Merger Arbitrage in a Rising-Rate Environment

Investors looking to invest in investments that are well-positioned for inflationary or higher interest rate environments may want to consider a merger arbitrage strategy.

Wednesday’s statement by the Federal Reserve stated that short-term interest rates were stable but not fixed. Signaling intentions to raise them in MarchHere is the latest update regarding plans to remove stimulus to lower high levels inflation.

Investors have been concerned about inflation for months. December’s Consumer Price Index reading showed a 7% increase year-over-year, marking the largest jump since early 1980s.

Inflation can lead to higher rates of inflation, which in turn leads to higher returns for merger arbitrage index.

The Merger Fund (MERFX).Virtus affiliate Westchester Capital Management manages. This mutual fund, which is the first to be exclusively dedicated to merger arbitrage, has historically outperformed bonds at rising rates.

The Bloomberg U.S. Since 1989, the Aggregate bond index has had 28 quarters of negative performance since its inception. The Bloomberg U.S. fund outperformed the fund (at NAV), 96% of all times. According to data from Morningstar, Westchester, Aggregate Bond Index.

This trend has been observed in three instances over the past decade.

The segment ran from August 2020 to September 2021. MERFXs annualized results were 2.82%. This was in contrast to the annualized returns for taxable and tax-exempt bond, which had annualized returns of -0.66%, 1.57% and 1.57%, according Morningstar and Westchester.

From June 2016 through the end 2018, MERFX had 4.75% in annualized return, compared with taxable and tax-exempt bond returns, which saw annualized yields of 0.37% or 0.92%, according to Morningstar.

MERFX had annualized returns in excess of 4.04% between July 2012 and the end of 2013. This compares to taxable and exempt bonds’ annualized return of -0.17%, 0.81% and 0.21%, respectively, according Morningstar and Westchester.

The same trend has been observed in the past periods of rising rates, such as August 2010 through March 2011, December 2009 through March 2010, and many other earlier decades.

MERFX offers diversification benefits as well. Deal risk is moderately to strongly correlated with conventional asset classes. Therefore, a merger arbitrage strategy could be added to a portfolio to increase diversification.

See Also

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These views and opinions are solely the author’s and do not necessarily reflect the views of Nasdaq, Inc.

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