Qualcomm itself had been the target of a $117 billion hostile bid by Broadcom, but the deal was derailed by the U.S. government, which cited national security concerns. Large deals such as this one generally offer better money making opportunities for hedge funds because the spread tends to be wider and the shares are very liquid, making it easier to trade in and out of a position.
In total, companies splurged $1.7 trillion on mergers and acquisitions in the first half, according to data compiled by Bloomberg. The total value of deals worth at least $5 billion more than doubled to $777 billion.
Yet some deals may reflect a desire to make use of cheap money while interest rates are still low, instead of longer-term thinking, leading to a bigger likelihood of them falling apart.
“Strategically, the deals that are happening appear to be of lower quality,” Flamand said. “People make approaches and then disappear. This makes it tougher for merger arbitrage funds.”
Another high-profile deal to fail, Fresenius SE’s $4.3 billion offer for American drugmaker Akorn Inc., has since evolved into a legal battle over exactly why the German health-care company dropped its bid. Fresenius officials said in April they pulled their offer after being misled about Akorn’s product-development practices. Akorn sued to force a completion of the buyout, saying the German company simply had “buyer’s remorse.”
Funds that got caught in the crossfire of such deals now face an accelerated client exodus as some investors conclude the strategy gives a false sense of protection and the money pools are not offering sufficient returns to compensate for the expected volatility in the market. Already, event-driven hedge funds -- which include merger-arbitrage strategies -- have been hit by $4.6 billion of net outflows during the first five months of this year, the most for any strategy, according to data compiled by eVestment. Hedge funds overall collected $12.5 billion during the period.
“There is now a general risk-aversion related to the growing anxiety on trade rhetoric from the U.S. administration and other governments around the world," said Michele Gesualdi, who oversees $3 billion as the chief investment officer at Kairos Investment Management, which invests in hedge funds.
This article was provided by Bloomberg News.