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New "arbitrage" ETF |
rffrydr
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 Posted: Wed Nov 18, 2009 12:26 pm Post subject: New "arbitrage" ETF |
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| Quote: | Tim Melvin
Arbitrage ETF? Not
11/18/2009 1:05 PM EST
I admit it. I occasionally take arbitrage positions. I have a long acquaintance with merger and liquidation arbitrage and have traded those markets for years when the opportunity arises. That is why my jaw hit the floor today when I received a twitter message about a new ETF making its debut. Of all the really bad ideas the mad scientist creators of Exchange Traded Funds this is the worst and to be honest the dumbest one so far. The Merger Arbitrage ETF (MNA) is the most poorly constructed fund I have seen so far.
In true merger arb in a stock deal you buy the target and short the shares of the acquiring firm in the proper ratio. In a cash deal of course, you don't hedge in most cases. These geniuses are buying the target companies and shorting and index EFT against it. That's not arbitrage. I am not sure what it is but it is not arbitrage. I would avoid this thing like the plague. |
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New "arbitrage" ETF Replies |
nodoodahs
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| Posted: Thu Jan 14, 2010 4:19 pm Post subject: |
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| Quote: | | Disclosure: Thomas Kirchner manages the Pennsylvania Avenue Event-Driven Fund (PAEDX), which owns shares of Sun Microsystems as part of its merger arbitrage strategy. |
Talking his book.
Lots of emphasis on semantics, i.e. “there’s no ARB” there, but in reality, there can be no arb in an ETF since it can’t short stock. Hence the use of inverse ETFs.
Given that the majority of currency managers can’t outperform naïve G10 3/3 carry, that the majority of EM hedge funds can’t outperform a 50/50 mix of EM equities and debt, etc., and especially given the work of Bridgewater which suggests that most merger arbitrage funds can’t outperform naïvely long/shorting the top 10 acquisitions ... I am willing to give the Index IQ product the benefit of the doubt. I think it has good odds of delivering better post-fee performance to its investors than the CS/Tremont Event-Driven HF index, or at the very least, delivering comparable performance to the retail crowd with a high R-Squared to the HF index!
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rffrydr
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nodoodahs
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| Posted: Wed Nov 18, 2009 1:45 pm Post subject: |
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It's practically impossible to perform the actual arb in an ETF structure.
Regardless, it would be interesting to compare the following:
(1) results of a long/short arb strategy, over the last 10 years, on the 20 biggest annual acquisitions
(2) same, but using the index futures or ETF as the short component
(3) the actual results of the merger arb hedge fund index over the same time frame 
Could be enlightening. 
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