2011 could be a banner year for merger arbitrage according to hedge fund managers interviewed for an article in Hedge Funds Review.
M&A activity heated up in 2010, totaling $2.4 trillion during the fall period, a 23% increase compared to 2009 levels. HFR interviewed Fabrice Seiman, portfolio manager of the event-driven hedge fund Lutetia Patrimoine, based in Paris. Seiman feels that that 2011 will be a better year for merger arbitrage as the “level of cash on corporate balance sheets for larger US companies is absolutely tremendous”.
Merger arbitrage, as you may know, is a hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless profit. According to Investopedia, a merger arbitrageur looks at the risk that the merger deal will not close on time, or at all. Because of this uncertainty, the target company’s stock will typically sell at a discount to the price that the combined company will have when the merger is closed. This discrepancy is the arbitrageur’s profit.
Steven Gerbel, founder of investment firm Chicago Capital Management, agrees with Seiman that 2011 will see increased M&A activity in healthcare, technology, and in his opinion, more mergers in the banking industry, as companies try to consolidate and clean up their balance sheets.
Gerbel is gearing up to hire for the activity level. “We have a lot of open desks we are looking to fill and have doubled staff in the last 12 months. We have updated, increased and improved our infrastructure as this spot in the M&A cycle won’t come around again for another 15 years,” he said.
What’s your take? Besides merger arbitrage, what other areas do you think will offer rich rewards for hedge fund job seekers in 2011? Add your comments below.