Global Deal Is a Play on M&A

The closed-end (GDL Quote)Gabelli Global Deal Fund (GDL), which raised $370 million in an initial public offering last week, offers small investors another way to capitalize on the boom in corporate merger activity.

But don't expect to reap hedge-fund-like performance.

Although the strategy employed by merger funds is more commonly associated with private investment pools that cater to the wealthy, their returns are generally unexciting. The $207 million (GABCX Quote)Gabelli ABC Fund (GABCX), an open-end fund with a similar strategy that is run by the same manager, Mario Gabelli, is up 1.6% for the year through Wednesday and has returned an annualized 6.7% over the past three years, according to Morningstar.

In fact, most merger funds are marketed on their "absolute returns," or their ability to make money in any market environment.

Merger funds generally profit by purchasing shares of companies involved in mergers, takeovers, spinoffs and other kinds of deals. The shares of companies being acquired typically don't realize their full purchase price until the deal is completed, because investors recognize that there is some risk the deal won't go through. When a deal is completed, fund managers pocket the difference between the price they paid and the acquisition price.

The strategy involves some risk, however. If a deal does fall through, a company's share price can fall back to its preacquisition level.