Mergers Collapse, Bubble Deflates, Debris Hits Hedge Funds

[marmar]

Mergers Collapse, Bubble Deflates, Debris Hits Hedge Funds
by Wolf Richter • May 12, 2016


[font color="blue"]The “arbs” got caught on the wrong side of the M&A collapse.[/font]

Hedge funds are getting bloodied in one of their favorite games, after years of a giddy boom in mergers and acquisitions with ever sillier valuations, made possible by an endless flow of easy money from yield-starved investors and fee-hungry banks, under the eyes of regulators who’d conveniently fallen asleep.

But that M&A bubble is now collapsing. And many hedge funds that were into merger arbitrage got caught on the wrong side of the bet.

Merger arbitrage is a bet that an announced acquisition gets completed. With the announcement, the share price of the target company shoots up to somewhere near the bid. If there’s hope that the bid will be raised, the share price might overshoot the bid. Once the target company agrees to be taken over, shares usually trade slightly below the acquisition price until the acquisition is completed. These price differentials can be exploited by merger arbitrage.

These can be huge, leveraged bets on what are expected to be minor price differences. Risks are thought to be low – unless the merger collapses. That’s when these “arbs” can get their heads handed to them. ................(more)

http://wolfstreet.com/2016/05/12/the-big-unwind-of-us-merger-bubble-bloodies-hedge-funds/

[Lodestar]

1. Thanks for the post. Sounds like somebody in government is at least

making it harder for these tax evaders. But there is so much regulation
that could be applied to hedge funds that hasn't.