Fund Spy

A Big Deal: Merger-Arbitrage Funds Are Benefiting From Higher Cash Rates

Bobby Blue
Jason Kephart, CFA

Liquid alternatives that invest primarily in corporate activities stood out in a volatile 2018 with relatively strong performance, and higher cash rates improve their prospects. These event-driven strategies can invest in any corporate action event but are most commonly involved in merger arbitrage. While higher cash rates should boost total returns for any alternative strategy that uses derivatives and holds cash collateral, its effect on total return is more apparent for lower-volatility strategies like merger arbitrage.

Event-driven funds are a subset of the market-neutral Morningstar Category because they primarily invest long and short in equities. Morningstar currently classifies 20 of the 51 mutual funds in the market-neutral category as event-driven (Morningstar Direct users can see this by adding the institutional category data point to a workbook). In 2018, the median event-driven fund gained 1.15%, outpacing the market-neutral category median return of 0.62%; every other liquid alternative category lost money for the year.

Bobby Blue does not own shares in any of the securities mentioned above.
Jason Kephart, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.