President Donald Trump is becoming a concern for event-driven investors, according to portfolio manager Gregg Loprete.
While volatility is usually a boon to Water Island Capital’s Loprete, manager of the Arbitrage Credit Opportunities Fund and the Arbitrage Event-Driven Fund, he said the uncertainty caused by the president’s trade policies and rhetoric creates headaches in anticipating the mergers and acquisitions that make his strategies shine.
“When he came into office, people said by and large this was going to be a pro-business administration, and that was a contributing factor to the markets doing well,” said Loprete. “It’s confounded investors lately, all the things being said about trade and mergers, and that’s led to volatility.”
Trump’s populist rhetoric is also spoking investors, said Loprete, who will speak at Financial Advisor's 9th Annual Inside Alternatives and Asset Allocation conference from Sept. 24 to Sept. 25 at the Wynn Las Vegas. The prospects for continued trade wars between the U.S. and trade partners like Mexico, Europe and China is likely to have a negative impact on business, he said.
Trade disputes also add a level of risk to international merger arbitrage strategies “with respect to deal completion,” Loprete said, but there are also domestic concerns surrounding Trump’s use of Twitter to comment on potential mergers and acquisitions.
“With antitrust issues, the courts should probably be the ultimate determinant, but we’ve seen him jump into the issues,” said Loprete. “Trump was out there tweeting about the AT&T-TimeWarner deal and it threw a lot of politics into economic policy. It’s been challenging for investors to decide what to do.”
Volatility is typically a catalyst for event-drive managers, said Loprete, because as other investors go risk-off, there are more sellers than buyers in the market and better valuations can be found.
Loprete also said that alternative strategies could help advisors fix fixed income.
“In the last two years, advisors have asked what they should do with their fixed income,” said Loprete. “Inflation is up, the 10-year yield is up. We don’t think they’re going to give up their fixed-income funds, but they want to make sure that the fixed-income part of their portfolio is stable, so they’ve been using us as a complement.”
The $46.3 million Arbitrage Credit Opportunities Fund (ACFIX), launched in 2012, is an unconstrained bond fund as it is not tied to any benchmark and its managers have few limits as to what investments they access. They employ Water Island Capital’s event-driven investment philosophy to find investment catalysts like mergers, refinancing and regulatory changes. Loprete is able to go short with a portion of ACFIX to try to hedge out the risks in the portfolio.