Murphy is on the management team for the Vivaldi Multi-Strategy Fund (OMOIX), a $77.4 million fund that allocates to four different alternatives strategies: a long-short equity strategy with no directional market exposure, a closed-end fund arbitrage relative value strategy, an announced deal merger arbitrage strategy, and an uncorrelated legacy non-agency structured credit strategy.
“It’s been an eventful first half,” says Murphy. “We’ve increased our allocation to our relative value and our merger arbitrage book. The merger arbitrage portfolio has benefited from what seemed to be a sticky backup in interest rates. We’ve had these backups in rates a couple of times, but they haven’t really persisted for more than a few weeks or months. This feels different. Our closed-end arbitrage book has had an uptick in volatility.”
While dispersion presents relative value opportunities, bad blood between international trading partners could sandbag merger arbitrage strategies, says Loprete. “Companies have to go to each country and file with antitrust regulators, administrators and bureaucracies,” he adds. “If tariffs are going up, it could make it difficult for approval to come from certain countries to get a deal done.”
On the other hand, an increase in transactions and share buybacks due to tax cuts expands the opportunity set for managers like Loprete.
Tax cuts and other potential fiscal stimulus put inflationary pressure on the economy, says Yardeni, but other factors help keep inflation in check: global trade, technological innovation and aging demographics, for example. Rising protectionism could increase the prices that Americans pay for goods, jump-start inflation and eat into investment returns.
“We grapple with inflation; we think that it’s coming, but we’ve just been through this incredibly long, controlled period,” says Horowitz. “The confluence of the sheer amount of capital in circulation, solid economic growth, low unemployment and healthy oil prices is going to have an impact over time on inflation, but our expectation is not for a huge shock.”
An inflationary surprise would almost certainly lead to a dramatic increase in interest rates, says Yardeni.