By Hugh Leask
Taconic Capital Advisors, the event-driven multi-strategy manager based in New York and London, is rolling out a new merger arbitrage fund as broader hedge fund industry sentiment turns positive on merger arb opportunities amid a “significant expansion” in deal activity.
Founded in 1999 by former Goldman Sachs partners Frank Brosens and Ken Brody, Taconic’s multi-strategy investment focus spans opportunistic credit, merger arbitrage, catalyst equities, and real estate sectors. The firm aims to generate solid risk-adjusted returns over multiple market cycles.
Its new single-strategy fund, which is looking to raise about $1 billion in assets, will be managed by Margaret Jones, who has led merger ab investing within Taconic’s opportunity fund for the past decade, Bloomberg reported this week.
The new launch comes as merger arbitrage funds reach a crossroads in 2024.
Managers here notched just 0.25% in the first three months of this year, in contrast with the broader hedge fund industry that gained more than 4.5% on average in Q1, according to Hedge Fund Research data.
Merger arbitrage hedge funds – which trade on widening spreads and other valuation moves resulting from company mergers, acquisitions, takeovers and other dealmaking activities – endured a challenging 2023 amid tougher antitrust scrutiny of deals from the Department of Justice and Federal Trade Commission in the U.S., and the Competition and Markets Authority in the U.K.
That ultimately dented merger arb returns last year. The sector added about 5% annually, lagging other event driven strategies such as activist (18%) and special situations (13.6%).
Better prospects on the horizon
However, market participants are growing increasingly optimistic on the merger arb prospects in the coming months.
Man Solutions upgraded its outlook from neutral to positive in its latest quarterly hedge fund strategy outlook, pointing to a “significant expansion” in both strategic acquisitions and mega-deals in the U.S. and Europe lately.
The unit – which builds and manages commingled and bespoke client portfolios utilizing investment expertise from across parent firm Man Group – said March had been another active month in M&A. It cited Bristol-Myers Squibb’s $14 billion takeover of pharmaceutical rival Karuna Therapeutics, and a developing bidding war between International Paper and Mondi for U.K. packaging outfit DS Smith.
“There are encouraging indicators that the M&A rebound will be sustainable, as rising valuations help bridge bid-ask spreads, pending M&A financing is meeting robust demand from capital markets, CEO forecast confidence has been picking up, and a growth in activism may become a driver of M&A campaigns,” Adam Singleton, chief investment officer of external alpha at Man Solutions, noted in the outlook.
Singleton said merger spreads continue to be attractive, particularly for more complex transactions, with deal spreads increasingly incorporating antitrust risk – the key challenge looming over the sector right now.
In previous periods of widened spreads – such as the 2008 financial crisis and the COVID-19 outbreak in Q1 2020 – merger arbitrage hedge funds went on to generate above average returns in the subsequent 18-24 months.
This article, “Taconic Capital unveils new merger arb launch as deal activity rises” was originally published on April 23, 2024 on Alternatives Watch and is republished here with permission from BMV Digital, Inc.
