Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Support MFO
Donate through PayPal
Why You Should Consider Investing In Merger Arbitrage Fund
The performance implied in the article for ARBFX and MERFX are not even close. More like 2-3% annualized.
The concept is good but there are many reasons why you should NOT consider these funds.
1. The funds are way too bloated for this investment strategy. There aren't that many mergers or acquisitions. These funds exist to make wealth for the management only.
2. With that much bloat, they all have to chase the same equities which reduces the spread between the acquirer and acquiree reducing the performance. Or they have to broaden their strategy globally or take the position earlier in the merger process which increases risk.
3. The role of these low volatility, low return funds in a portfolio isn't clear. Unless you give a significant allocation to these funds in your portfolio, they make very little difference to portfolio volatility and their returns will be in the noise. If you give a significant allocation, they drag down your portfolio returns significantly except in prolonged bear markets. But in such markets, they will also lose money, so they aren't good bear market hedges like bonds or income.producing for withdrawal stage.
I guess they could be used in a "one of everything" kitchen sink portfolios as they aren't likely to harm the portfolio significantly.
Thanks for making comment on this interesting strategy.
I use sleeve fund mythology (collection through study of funds) in my portfolio. I currently own about fifty funds which are divided among ten sleeves with positions ranging form three to six funds per sleeve. With this, if one fund’s strategy (or it's manager) falter then there are other funds within the sleeve that offer production. A recent example of this would be found in my hybrid income sleeve where Pimco's All Asset Fund fell on difficult times and, with this, there were five other funds that were good producers thus enabling good production for the sleeve as a whole last year. Although the sleeve method requires a good number of funds to best utilize, I have found it to be beneficial.
The only area that arbitrage funds would fit within my portfolio is in the specialty sleeve. And, even at this I do not see a fit for them. From my thinking it is as you say … The benefit is limited as it seems opportunity is also somewhat limited and as more funds employ these strategies the less likely good returns will be had as the table becomes more crowded thus diluting returns.
I found the article good and interesting reading but arbitrage funds themselves are not something I am choosing to include within my own portfolio. However, I do own some funds that form time-to-time have used arbitage strategies as a part of their investment platform.
I think ARBFX was closed not that long ago? I find the slightly more volatile Arbitrage Event-Driven more interesting, but I don't have a place for this strategy in my portfolio.
These funds do well in good times and bad, but they are something that can be counted on for light singles year-after-year. A double is a really good year.
Equity strategy with bond-like returns is sort of how I'd describe them.
Comments
The concept is good but there are many reasons why you should NOT consider these funds.
1. The funds are way too bloated for this investment strategy. There aren't that many mergers or acquisitions. These funds exist to make wealth for the management only.
2. With that much bloat, they all have to chase the same equities which reduces the spread between the acquirer and acquiree reducing the performance. Or they have to broaden their strategy globally or take the position earlier in the merger process which increases risk.
3. The role of these low volatility, low return funds in a portfolio isn't clear. Unless you give a significant allocation to these funds in your portfolio, they make very little difference to portfolio volatility and their returns will be in the noise. If you give a significant allocation, they drag down your portfolio returns significantly except in prolonged bear markets. But in such markets, they will also lose money, so they aren't good bear market hedges like bonds or income.producing for withdrawal stage.
I guess they could be used in a "one of everything" kitchen sink portfolios as they aren't likely to harm the portfolio significantly.
Thanks for making comment on this interesting strategy.
I use sleeve fund mythology (collection through study of funds) in my portfolio. I currently own about fifty funds which are divided among ten sleeves with positions ranging form three to six funds per sleeve. With this, if one fund’s strategy (or it's manager) falter then there are other funds within the sleeve that offer production. A recent example of this would be found in my hybrid income sleeve where Pimco's All Asset Fund fell on difficult times and, with this, there were five other funds that were good producers thus enabling good production for the sleeve as a whole last year. Although the sleeve method requires a good number of funds to best utilize, I have found it to be beneficial.
The only area that arbitrage funds would fit within my portfolio is in the specialty sleeve. And, even at this I do not see a fit for them. From my thinking it is as you say … The benefit is limited as it seems opportunity is also somewhat limited and as more funds employ these strategies the less likely good returns will be had as the table becomes more crowded thus diluting returns.
I found the article good and interesting reading but arbitrage funds themselves are not something I am choosing to include within my own portfolio. However, I do own some funds that form time-to-time have used arbitage strategies as a part of their investment platform.
Thanks again for your insightful comments.
Old_Skeet
These funds do well in good times and bad, but they are something that can be counted on for light singles year-after-year. A double is a really good year.
Equity strategy with bond-like returns is sort of how I'd describe them.