Wealth Manager-Merger arbitrage a good deal for investors

* Opportunities in M&A seen increasing this year-Knepp

* Merger arbitrage a good way to diversify-Knepp

* Advisers can get access to strategy through mutual funds

By Helen Kearney

NEW YORK, April 19 (BestGrowthStock) – Advisers looking to
diversify client portfolios and provide reasonable returns may
want to consider an investment strategy long favored by hedge
funds — merger arbitrage.

Tim Knepp, chief investment officer at Genworth Financial
Asset Management (GNW.N: ), in a recent presentation said funds
and ETFs focused on merger arbitrage — buying and selling
shares of companies involved in mergers — was one of his top
investment strategies this year.

“We’ll see a pick-up in merger and acquisition activity
this year,” said Knepp, whose unit oversees $7 billion in
client assets, in an interview. “And this is a solid strategy
that allows you to diversify market risk.”

Merger arbitrage seeks to take advantage of the price
movements surrounding stocks after a transaction is announced.
Traders buy the target company stock with the expectation that
it will increase in value when the deal closes.

Usually when a deal is announced, the target company’s
stock rises, but not as high as the acquiring company’s offer
price. The spread between the two prices reflects the chance a
deal does not go through.

Arbitrageurs also short shares of acquirers’ stock, which
typically falls when a deal is announced.

Knepp said this strategy is a good way to diversify a
portfolio because it is not linked to market ups and downs.

Merger activity also should rise this year, Knepp said, as
many companies have amassed cash reserves and enjoy higher
share prices. They are also seeking ways to boost income after
years of cost-cutting.

“There’s a motivation for companies to grow through
acquisition,” said Knepp.

Nadia Papagiannis, an analyst at Morningstar, said there
were more opportunities in this strategy last year, after a
number of hedge funds that had long dominated this space were
forced to close during the financial crisis.

That allowed retail investors to jump in, though now she
sees hedge funds returning and reclaiming their strategy.

Most financial advisers get access to this strategy through
mutual funds, said Knepp. Genworth, he said, invests in the
Merger Fund (MERFX.O: ), the Arbitrage Fund (ARBFX.O: ) and the AQR
Diversified Arbitrage Fund (ADAIX.O: ).

Knepp said he typically invests 5 to 7 percent of a
client’s portfolio in arbitrage strategies.

Over the past year, the Arbitrage Fund has performed the
best, returning 9.1 percent. The Merger Fund returned 8.2
percent and the Diversified Arbitrage Fund, which also uses
other arbitrage strategies, returned 8.0 percent.

There is also an exchange-traded fund, Index IQ’s IQ ARB
Merger Arbitrage ETF (MNA.P: ), which was launched in November.

The ETF works slightly differently, buying the target
company’s stock but shorting a market index rather than
shorting the acquiring company’s stock. This means that it does
not provide as much diversification as a mutual fund, said
Pappagiannis.

Year-to-date, the ETF has returned 2.76 percent.
(Reporting by Helen Kearney; Editing by Gary Hill)

Wealth Manager-Merger arbitrage a good deal for investors