Barclays has launched the Barclays Merger Arbitrage US Index, a new addition to the Barclays range of Quantitative Investment Strategies. The index, which is suitable to underlie future investment products such as ETFs, will allow investors to access potential returns from the successful completion of announced merger deals in the US.
A merger arbitrageur aims to capture the deal spread between the price of the merger target shares and the terms of the deal.
Dhvani Gupta, EFS Solutions, commented: “The Barclays Merger Arbitrage US Index aims to provide clients with a cost-efficient, liquid and transparent way of accessing a strategy more commonly deployed by hedge funds. The index follows a fully systematic, rules-based approach, and aims to provide a diversified exposure to merger arbitrage opportunities in the US market.”
The index aims to capture the deal spread between the price of the merger target shares and the terms of the deal. It takes a long position in the target company of the merger and a short position in the acquirer.
A merger arbitrageur looks at the risk the merger deal will not close on time, or at all. Because of this slight uncertainty, the target company’s stock typically sells at a discount to the price of the combined company when the merger is closed. This difference represents the profit to the manager of a merger arbitrage hedge fund strategy.
The index provides exposure to a diversified range of deals in different sectors, reducing the amount of risk taken in any one deal. It is also available in a version where the index takes an additional short position in the US equity market to hedge out any residual market exposure of the portfolio of long target shares and short acquirer shares.
According to Bloomberg’s Global M&A Market Review, merger and acquisition deal flows in the US were strong with $280 billion of deals announced in the first quarter of 2017.
The index has recently exhibited strong returns with back-tested excess returns of 4.03% in 2016 and 1.60% in 2017 to the end of May, with a low volatility of around 4% over the last year.
Barclays launched its first Merger Arbitrage indices in 2010.
“Barclays is delighted to expand our range of indices and increase the breadth of strategies available to investors via index format,” said Benedict Redmond, director EFS Solutions. “We believe that this index should be compelling for a wide range of investors looking at source of returns other than traditional equity and fixed income beta, and again demonstrates the innovation in index-based investing.”