The Performance of Merger Arbitrage Hedge Funds in Different Market Conditions

Abstract

The purpose of this study is to examine the performance of merger arbitrage hedge funds in both up and down-market conditions. Hedge funds are an alternative investment type that utilizes different trading strategies in order to generate return. Hedge funds are assumed to have low correlation with traditional market portfolios and therefore be a good investment for people seeking return regardless of the current market situation.

This study will focus on a niche part of hedge funds, the merger arbitrage hedge funds. The data used in this study is comprised of monthly index returns of HFRXMA Index (Hedge Fund Merger Arbitrage Index). These returns are compared to monthly returns of the SPX (S&P 500) Index in order to evaluate whether merger arbitrage funds are outperforming the returns of the market index between 2005 and 2016. The performance of the merger arbitrage funds is calculated using risk-adjusted measures and compared to the market index performance. Correlation of the returns between these indices is tested by utilizing simple linear regression model.

The result suggest that merger arbitrage hedge funds provide positive absolute returns regardless the market conditions. Further, these funds seem to outperform the market returns in both bull and bear markets. However, statistically significant positive correlation is found between the returns of HFRXMA and SPX indices.