11
Merger Arbitrage
I don’t want hedge fund managers to learn. At least, not with my money.
Rule no.1
Merger arbitrage, also known as risk arbitrage, is usually recognized as one of the oldest event-driven strategies. Its origins date back to the 1940s, when Gustave Levy officially established the arbitrage desk at Goldman Sachs. Levy’s goal was to extract value from the particular price changes of companies involved in corporate control transactions such as mergers and acquisitions. His strategy was relatively simple, but profitable: he invested in merger and acquisition targets after the deals had been announced and pocketed the spread between the market price of the target company following the announcement and the deal price upon closing. This spread was usually narrow and only offered a modest nominal total return. However, since most deals closed in much less than a year’s time, Levy was able to translate this modest total return into a much more attractive annualized return figure.
Although merger arbitrage has not evolved much since its origins, the arbitrage desk of Goldman Sachs maintained its reputation and continued to attract talent like a magnet. Among others, its list of alumni includes the former United States Treasury Secretary Robert E. Rubin, as well as his protégés: the star hedge fund managers Daniel Och (Och Ziff), Richard Perry (Perry Partners) and Thomas Steyer (Farallon Capital). But before getting into the details of their strategy, let us first shed ...

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