Philippe Ferreira

Philippe Ferreira

Director, Senior Cross-Asset Strategist

Lyxor Asset Management


Merger arbitrage shows high resilience in recent market reversal

12 Feb 2018

Investment Partners

After a very strong start to the year, risk assets experienced a trend reversal lately. The MSCI World was down 3.1% during the last week of January. Euro Area and Japanese equities underperformed the U.S. market while EM equities and high yield credit were resilient.
 
On the alternative front, January was strong in terms of performance. CTAs outperformed and both L/S Equity and Event Driven posted good results as a result of solid beta contributions.
 
Yet, the reversal at the end of January saw L/S Equity market neutral and merger arbitrage outperforming. In parallel, high beta strategies such as special situations and L/S Equity underperformed. CTAs were fairly resilient despite the sharp trend reversal in equities.
 
Going forward, we note the strength of global economic activity and do not expect a major market correction. However, stretched valuations argue for a cautious approach to risk assets.
 
In that regard, merger arbitrage ticks several boxes. Its low correlation to risk assets was again demonstrated recently. It is a low volatility strategy which currently benefits from favorable conditions with deal spreads above 7% in the U.S. Finally, strong M&A activity in the U.S. in January should provide ample investment opportunities for the strategy. Overall, we stay OW Event-Driven and merger arbitrage in particular.

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