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Tiffany, New York

Veteran event driven manager launches merger arbitrage ETF


Water Island Capital has a 20-year history of managing money in event-driven strategies and has chosen this most event-driven of times in which to launch its first ETF, the AltShares Merger Arbitrage ETF.

The firm, which manages USD2.5 billion in event-driven strategies, writes that COVID-19 has created significant dislocations in this market similar to the macro-driven spread widening witnessed during 2008 and 2016, but comments that deals continue to close at the original terms agreed upon by the companies, even in this chaotic market.

The AltShares Merger Arbitrage ETF is designed to offer exposure to a proven, ‘pure play’ merger arbitrage strategy capable of capitalising on the idiosyncratic opportunities in today’s uncertain environment.

Eric Becker, senior analyst from the active merger arbitrage strategy, and co-portfolio manager of the ARB ETF, says: “For several years, our clients and the general investment community  have come to us, expressing interest in a passive ‘pure play’ merger arbitrage strategy, so given our 20 years of experience managing alternative investments we took on the challenge of developing an investible merger arbitrage index and ETF.  Launching during the pandemic was not part of our original plan, but this environment has provided some great opportunities for our strategy.”

Becker comments that while Covid 19 created significant dislocations in deal spreads, there were also unique opportunities in late March and early April. Spreads have now narrowed but there are still opportunities, he says.

One deal in Water Island Capital’s sights includes the purchase of Tiffany by Louis Vuitton. “Although Tiffany’s business has been disrupted by Covid 19, the deal is a highly strategic brand extension by a motivated, long-term buyer.” Becker says.

The team expects M&A activity to pick up again in the back half of the year, as the pandemic subsides and businesses slowly return to its “new normal”. “What we have learned from the past is that substantial declines in merger activity have led to sharp recoveries, so we expect one in the second half of 2020. It tends to be a prosperous time for us in the months and years following market sell offs, as quality assets are trading at discounted prices because of leveraged balance sheets or depressed commodity prices, so we tend to see opportunistic bids coming in, which can lead to bidding wars.”

Chris Plunkett, co-portfolio manager of the ETF, says: “As experienced merger arbitrageurs we focused on building out an index that embodies our core principles of merger arbitrage. It’s taken several years to construct the index. The development process included tapping into all the knowledge that our active management team has while also making significant investments in the firm’s technology, risk management and software engineering capabilities.”

The firm’s merger arbitrage index methodology assesses opportunities across the entire merger arbitrage universe and the index is re-balanced every two weeks. “It’s a complex rule set that seeks to capture the many intricacies of merger arbitrage investing.” Plunkett says.

Water Island Capital has a longstanding relationship with many institutional investors and retail investors who have used their variety of in-house investment vehicles, from private funds, to mutual funds, to managed accounts.

Becker says: “Our goal is to take our strategies and make them wrapper-agnostic.”

“Merger arbitrage seeks to provide investors with a market neutral, uncorrelated return stream.” Plunkett says. “It is a strategy that can serve as a strong complement to existing portfolios.

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