New York-based IndexIQ has announced that the IQ Merger Arbitrage ETF (MNA US) has surpassed $1 billion in assets under management.
The fund is designed to provide returns similar to those offered by merger arbitrage hedge funds.
The fund provides returns similar to those attributable to hedge funds pursuing merger arbitrage strategies.
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 launched in November 2009, becoming one of just a few ETFs at that time to offer exposure to the alternatives asset class.
“When we launched the IQ Merger Arbitrage ETF nearly a decade ago, we knew we were breaking new ground for ETF investors,” said Sal Bruno, Chief Investment Officer of IndexIQ. “To that point, there were no low cost, liquid, transparent means through which to add merger arbitrage exposure to a portfolio. That meant investors were missing the opportunity to add the risk mitigation and volatility dampening aspects that merger arb can provide.”
Methodology
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.
Deals must have greater than 50% ownership sought by the acquirer, and eligible transactions include acquisitions, mergers, leveraged buyouts, and private equity funding. Minority interests, unit divestitures, target ownership, state-owned, and joint ventures are excluded. IndexIQ calculates probability scenarios for each eligible deal, removing stocks for which it concludes the probability of a profitable return too low.
Remaining constituents are weighted by their seven-day median trading value, and index reconstitution and rebalancing occur on a monthly basis. The index also consists of short positions in a variety of regional, country, and sector ETFs so as to provide a partial hedge against beta exposure.
The ETF is offered with an expense ratio of 0.78%, consisting of a 0.75% management fee and 0.03% in acquired fund fees and expenses.
Commenting on the benefits the fund provides investors in the current environment, Bruno said, “Merger arbitrage strategies have historically generated relatively stable returns, and global M&A activity remains robust. With global growth, Brexit, and trade driving volatility into the markets, and in an uncertain interest rate environment, investors are looking for solutions to help them maintain market exposure while still managing downside participation.”
IndexIQ also offers the IQ Hedge Multi-Strategy ETF (QAI US) which provides exposure to several hedge fund investment approaches within a single wrapper. The fund tracks the IQ Hedge Multi-Strategy Index which covers a range of strategies including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets. It comes with an expense ratio of 0.79% and also has approximately $1bn in AUM.
Jon Zimmerman, Chief Operating Officer of IndexIQ, said, “IndexIQ was founded with the belief that investment management needed to be democratized, allowing investors and advisors of all types to access institutional-quality strategies. It was a radical idea at the time, but we’re proud of the response that our family of ETFs has generated over the past ten years, and we’re just as excited to continue to bring innovative new approaches to the marketplace.”