Characteristics of Merger Arbitrage Strategy

Easy Hedge Fund Strategies Event-driven

In the context of hedge fund strategies, event-driven investing typically involves taking positions based on predictable events that can significantly impact the valuation of securities. One popular approach within this category is merger arbitrage.

Consider a merger arbitrage strategy where a hedge fund is evaluating the acquisition of Company A by Company B. After the announcement of the merger, Company A’s stock trades at a price significantly lower than the buyout price offered by Company B.

The fund anticipates that the merger will go through and intends to capture the spread between the current price of Company A’s shares and the anticipated buyout price when the transaction closes.

Which of the following is the most likely characteristic of this merger arbitrage strategy?

It typically involves shorting the stock of the acquiring company.

It usually results in high transaction costs due to long holding periods.

It seeks to profit from the price discrepancy between the current stock price and the anticipated acquisition price.

Hint

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