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Digital Subscriptions > The Hedge Fund Journal > Issue 112 - March | April 2016 > Lyxor Tiedemann’s Merger Arbitrage Sweet Spot

Lyxor Tiedemann’s Merger Arbitrage Sweet Spot

Veteran manager relishes complexity and volatility

Drew Figdor, whose weekly-dealing Lyxor UCITS fund won The Hedge Fund Journal’s 2014 UCITS Hedge award for ‘Best Performing New Fund,’ after its double digit return in 2013, has been trading merger arbitrage since the 1980s (and on the Lyxor platform since 1999). Seldom has Figdor been so excited about the opportunity set as he is in early 2016. “The market dislocation has increased the opportunity set and we are seeing deal premiums of 60-100%,” he enthuses, and reels off four deals: healthcare heavyweight Abbot bid for Alere at a 60% premium; drug-maker Mylan bid for Sweden’s Meda at 100% over; China’s ZoomLion conglomerate offered a 100% premium for US manufacturer Terex; and Westlake Chemical went hostile in stumping up a 108% bump for Axial. These premiums are quite extraordinary when the historical average takeover premium is in the region of 30%. Cheaper investment grade financing is one driver for the deals as investment grade corporate bond yields are, arguably, tracking the drop in US Treasury yields. Figdor thinks some cyclical stocks became severely oversold.

Gargantuan premiums and elevated, often double-digit, spreads are two reasons why Tiedemann is ramping up exposure; the old rule of thumb about merger arbitrage offering 1.5 or 2 times the risk free rate does not seem to make sense now. Tiedemann’s benchmark programme has increased gross long exposure from 55% in August 2015 up to 105% by December 2015. It is one of many liquid strategies that fit easily into a UCITS, and its concentration limits have always been inside the UCITS diversification criteria. Unusually for a UCITS feeder, the Lyxor strategy offers investors a higher level of risk: 1.5 times that of Tiedemann’s merger arbitrage strategy, meaning that it was running gross long exposure around 158% at year end. “The risk reward now is two to three times greater than what it was in August as spreads have widened,” opines Figdor, who also battens down the hatches when he has lower conviction: historically the lowest gross long exposure was 40% in 2002.

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