First Trust launches actively managed merger arbitrage ETF

Feb 7th, 2020 | By | Category: Alternatives / Multi-Asset

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First Trust Advisors has launched an actively managed ETF in the US providing returns similar to those attributable to hedge funds pursuing merger arbitrage strategies.

First Trust launches actively managed merger arbitrage ETF

The fund provides returns similar to those attributable to hedge funds pursuing merger arbitrage strategies.

The First Trust Merger Arbitrage ETF (MARB US) has listed on NYSE Arca and comes with an expense ratio of 1.94%.

Merger arbitrage aims to capture the ‘deal spread’ of a potential acquisition by taking a long position in the target company 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 fund, which is sub-advised by investment adviser Vivaldi Asset Management, seeks long-term capital appreciation by establishing long and short positions in developed market equity securities of companies that are involved in a publicly announced merger or acquisition.

In deciding upon which opportunities to invest in, Vivaldi utilizes quantitative research to assess a number of factors, including the probability that the merger will be completed, the attractiveness of the transaction, and any unique risks which may decrease the likelihood that the transaction will close.

The ETF will typically invest in between 20-60 transactions and may hold significant cash if the number of opportunities is low. Short positioning will be limited to 50% of total portfolio assets.

Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust, commented, “As the leading provider of actively managed ETFs, we are happy to expand our line-up to include this merger arbitrage strategy. Since this ETF is expected to have low correlations to both stocks and bonds, we believe it will be an effective tool for investment professionals seeking to further diversify their clients’ portfolios.”

Michael Grayson, Portfolio Manager at Vivaldi Asset Management, added, “We are very excited to work with First Trust and add to the firm’s successful range of actively managed ETF strategies. We believe merger arbitrage presents a compelling opportunity for investors as merger and acquisition activity continues to benefit from record levels of corporate cash reserves, favourable equity market conditions, low cost of debt, and corporate boardroom confidence to pursue growth through acquisitions.”

The largest existing merger arbitrage ETF is the passively managed IQ Merger Arbitrage ETF (MNA US) which houses $980m in AUM and comes with an expense ratio of 0.78%.

The fund is linked to the in-house IQ Merger Arbitrage Index which consists of developed market stocks for which there has been a public announcement of a takeover by an acquirer. IndexIQ calculates probability scenarios for each eligible deal, removing stocks for which it concludes the probability of a profitable return too low. The remaining constituents are then weighted by their seven-day median trading value.

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