Merger Arbitrage is a Hedge Fund Strategy

The MMCAP Fund is a Canadian-based fund that focuses on such strategies as merger arbitrage to provide the optimum in a risk-managed return. Co-founder Matthew MacIsaac and the MMCAP Fund staff are dedicated to maintaining a fund account that features maximized returns with a heavy emphasis on risk management.

To even a seasoned trader the concept of merger arbitrage may seem somewhat complicated. The investment practice combines the purchasing and selling of stocks for companies involved in a merger.

Arbitrage itself entails the purchase of a stock on one exchange so it can be resold on another exchange in order to reap a profit. However, in hedge fund investing, the term usually concerns the simultaneous purchase and sale of two stocks whose price is not in alignment with their actual worth.

Therefore, the practice involves selling the “overpriced” shares short and purchasing the stock that is considered to be undervalued. Once the stock prices revert to their actual value, a profit can be realized. Besides stocks, the practice is used to purchase and sell commodities and similar securities.

Merger arbitrage is designed then to take advantage of stock price discrepancies that can happen during a merger as well as during an acquisition or bankruptcy.


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