Over the recent months, the rally in risk assets pushed equity valuations to unprecedented levels since the early 2000s, leading investors to ponder whether this is a good time to reduce risk in portfolios. Yet, the likelihood that the Fed will extend asset purchases at the next FOMC meeting on September 16th suggests investors should not play too defensive. With bond yields not far from all-time lows in the U.S. and Europe, the opportunity set within defensive assets is reduced as well.
Merger Arbitrage strategies have the potential to provide alternative options vs. traditional safe assets in an effort to reduce risk in portfolios. Historically, it is a strategy with a low correlation to equities. According to our estimates, the strategy was flat in August when equities rallied but it was also immune to recent Tech-related turbulence.