This article was originally published on ETFTrends.com.
ETF investors who are looking for a way to diversify a traditional portfolio mix and look for ways to hedge against further market volatility should consider resilient investments like a merger-arbitrage strategy.
On the recent webcast, How to Build Resilient Portfolios with Uncorrelated Solutions, John Davi, Founder and Chief Investment Officer, Astoria Portfolio Advisors, pointed to a number of key themes investors should consider when building their portfolio for the year ahead, pointing to characteristics like capital preservation, diversification, lower portfolio beta, quality and low volatility. Specifically, Davi highlighted alternative strategies to lower an investment portfolio's beta.
"We believe investors should look at alternatives which are return generators, as well as risk reducers. Merger arbitrage is our top alternative idea," Davi said, adding that the strategy helps capture the risk premium in the M&A market.
An alternative investment like the Index IQ Merger Arbitrage ETF (MNA) can help investors gain more diversified returns as the investment provides lower correlation to traditional stocks and bonds. For example, Salvatore Bruno, Chief Investment Officer and Managing Director, IndexIQ, pointed out that while 2018 began with equity volatility and the Aggregate Bond Index showing signs of having its first negative year since the 2013 Taper Tantrum and the 2007 Financial Crisis, MNA delivered consistent returns unphased by both equity and bond stress.
"MNA returns were not materially influenced by the overall equity and fixed income markets as demonstrated by its low to zero correlation to market indices," Mark Lacuesta, Director, Index Strategies, IndexIQ, said.
"The equity holdings produced strong risk-adjusted returns similar to equity indices, yet the lack of correlation provides diversification benefits like bonds, without duration risk," Lacuesta added.
The merger arbitrage strategy is designed to take advantage of price discrepancies that exist for companies involved in a merger; can be used as a hedged or alternative investment strategy that benefits by purchasing companies at prices below the target price and capturing the remaining premium; and targeting this spread seeks to deliver returns that are generally immune from fluctuations of the broader market. Additionally, merger arbitrage strategies have historically generated relatively stable returns across various market environments.
"Allocating from both equity and fixed income sleeves resulted in an improved Sharpe ratio (return per unit of risk), and lower volatility (standard deviation)," Lacuesta said.
Looking ahead, Bruno argued that M&A activity is expected to remain robust in 2019.
"We see opportunity in M&A as tax reform, deregulation across select industries, and continued economic expansion provide a high likelihood that record M&A activity will continue," Bruno said.
Financial advisors who are interested in learning more about alternative investment strategies can watch the webcast here on demand.
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