Is merger arbitrage a good strategy?

Merger arbitrage tends to be a high-turnover strategy with many low-risk/low-return positions that change every few months. Because of this lower perceived risk, most merger arbitrage funds use leverage to boost their potential returns and their risk.

How does arbitrage merger work?

Merger arbitrage is the business of trading stocks in companies that are involved in takeovers or mergers. The most basic of these trades involves buying shares in the targeted company at a discount to the takeover price, with the goal of selling them at a higher price when the deal goes through.

Is arbitrage still possible?

Despite the disadvantages of pure arbitrage, risk arbitrage is still accessible to most retail traders. Although this type of arbitrage requires taking on some risk, it is generally considered “playing the odds.” Here we will examine some of the most common forms of arbitrage available to retail traders.

What is a merger arbitrage hedge fund?

Merger arbitrage, often considered a hedge fund strategy, involves simultaneously purchasing and selling the respective stock of two merging companies to create “riskless” profits.

Is merger arbitrage riskless?

What Is Merger Arbitrage? Merger arbitrage, often considered a hedge fund strategy, involves simultaneously purchasing and selling the respective stock of two merging companies to create “riskless” profits.

Is merger arbitrage insider trading?

“Rumors” and Merger Arbitrage Deals There is always the possibility of insider trading or trading based on “rumors” when dealing with these types of transactions. The market price of the companies in a deal will move up and down in the weeks and months following the merger announcement based on new information.

Why does merger arbitrage exist?

This spread exists because selling a security at a discount to its deal price provides immediate liquidity to the seller. The spread is compensation to the arbitrageur for taking on risk that the stockholder (who owned the stock prior to deal announcement) no longer wants to bear.

Is arbitrage really risk free?

Arbitrage can be used whenever any stock, commodity, or currency may be purchased in one market at a given price and simultaneously sold in another market at a higher price. The situation creates an opportunity for a risk-free profit for the trader.