Betting on M&A

I recently purchased Index IQ Merger Arbitrage ETF (ticker symbol: MNA).  I have written previously about the glut of cash on corporate balance sheets and would anticipate this cash to be used for share buybacks, increases in dividends, or possibly merger activity.  Merger activity has started to increase in recent weeks, most notably as HP and Dell continue to battle over 3PAR.

As opposed to traditional merger arbitrate hedge funds who long takeover targets and short the acquiring firms prior to an official announcement, MNA only purchases funds after a merger has been announced.  By doing this, MNA seeks to profit from the spread between the current stock price and the deal price.  The risk in doing this lies in the possibility that the deal falls through.  While this is always a risk, I think the risk might be less in the current environment.

More importantly, MNA is not highly correlated with more traditional asset classes, so this should lessen overall portfolio volatility.  The fund only has under $30M in AUM currently, so it will be interesting to see if this ETF is able to pick up steam in the coming months as M&A activity continues to pick up.