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Merger Arbitrage Hedge Funds Benefitting From SPAC Boom

The boom in SPAC issuance in the United States this year has provided opportunities for merger arbitrage hedge funds, according to Lyxor Asset Management's Cross Asset Research department's latest weekly hedge fund brief. SPACs are attractive for merger arbitrage strategies as they offer an attractive and low volatility return profile, according to Lyxor.

"SPACs were strong positive contributors to Merger Arbitrage returns last month. They should allow robust M&A volumes in the quarters to come, with USD 50bn of unlevered capital available to make acquisitions according to Dealogic as of end-Q3SPACs were strong positive contributors to Merger Arbitrage returns last month," says the report.

Merger Arbitrage has benefitted from attractive deal spreads, renewed M&A volumes in the U.S., and from its power of diversification. Lyxor estimates its equity market beta to be just 3% now, below the 5-year average of 8%.

"This contributes to explain why the strategy was highly resilient in October, despite the equity market plunge amid renewed lockdowns in Europe," says Lyxor in the report.

Due to the reasons above, Lyxor is overweight merger arbitrage at present.

"We particularly favour this strategy in a context where valuations are rich across traditional asset classes and the Covid-19 resurgence poses huge downside risks to economic activity and financial assets. Amid rising public indebtedness, sovereign bonds are not an attractive option to diversify portfolios. In turn, M&A volumes and deal spreads remain supportive for Merger strategies, which we favour compared to other low beta strategies such as market neutral L/S equity and CTAs."

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