This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Why You Should Consider Investing in Merger Arbitrage Funds

NEW YORK (TheStreet) -- Markets and investing have become more complicated in 2014 compared to last year. The bull market in stocks is showing signs of age, while bond investors are trying to figure out whether Federal Reserve tapering will lead to higher interest rates.

That means now is the time for investors to seek ways of reducing their portfolios' volatility, both in equities and fixed income. One way is merger arbitrage funds, such as the Merger Fund (MERFX) and the Arbitrage Fund (ARBFX). Both of them practice what's known as merger arbitrage, betting that shares of the acquired company will rise while those of the acquirer fall.

An article this past weekend in Barron's noted the funds' steady returns and low volatility. In addition, these funds tend to trade differently from both equities and fixed-income securities.

The broad strategy is that the after a merger is announced a merger fund will buy the stock of the company being acquired and sell short the shares of the acquirer to capture the spread between the two until the deal is finalized. Because these funds incorporate both long and short trading, their volatility in general should be lower than that of the typical equity fund.

The Merger Fund and the Arbitrage Fund are mutuals funds, but there are also several exchange-traded products that follow a similar strategy, including the Credit Suisse Merger Arbitrage Liquid ETN (CSMA) and the Index IQ Merger Arbitrage ETF (MNA).

It's important to note that these four funds do not have identical holdings and use different tactics.

The Credit Suisse Merger Arbitrage Liquid ETN goes long the company being acquired but will only short the acquirer if it is using its own stock for the deal.

If the acquirer is buying the other company with cash, however, the Credit Suisse fund will simply hold cash instead of a corresponding short position. This fund has a 0.55% expense ratio. Technically, it's an exchange-traded note, which means CSMA does not own the underlying positions. Rather, it is an unsecured debt obligation of Credit Suisse that tracks an underlying index.

The Index IQ Merger Arbitrage ETF does not short individual stocks but instead creates short exposure by using broad-based indices. It has an expense ratio of 0.77%.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,982.59 +22.02 0.13%
S&P 500 1,978.91 +0.57 0.03%
NASDAQ 4,444.9090 -4.6550 -0.10%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs