risk arbitrage


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Related to risk arbitrage: Merger arbitrage

Risk arbitrage

Traditionally, the simultaneous purchase of stock in a company being acquired and the sale of stock of the acquirer. Modern risk arbitrage focuses on capturing the spreads between the market value of an announced takeover target and the eventual price at which the acquirer will buy the target's shares.

Risk Arbitrage

In hedge funds, an investment strategy related to mergers and acquisitions involving the purchase and/or shorting of an acquired company's stock. In a cash merger, the stock of the acquired company often trades below the offer price until the deal is completed. A hedge fund may buy at the lower price and wait for the deal to be completed, at which point it makes a profit. In a stock-for-stock merger, the acquiring company (with more valuable stock) offers to exchange the acquired company's stock for its own at a certain ratio. A hedge fund may then short sell the acquiring company's stock while simultaneously buying stock in the acquired company. When the deal goes through, the acquired company's stock is converted and the new stock returned to the owner from which the hedge fund borrowed. In both these situations, the primary risk is the possibility that the deal may fail in the middle of the hedge fund's transactions. See also: Exchange ratio.

risk arbitrage

The simultaneous purchase and sale of assets that are potentially, but not necessarily, equivalent. For example, Firm A may make an offer to acquire Firm B by exchanging one share of its own stock for two shares of Firm B's stock. If the stock of Firm A is trading at $50 and the stock of Firm B is trading at $23, the risk arbitrager would buy shares in Firm B and sell short one-half this number of shares in Firm A. If the buyout offer is approved, the two stocks will exchange on a one-for-two basis and the arbitrage position will be profitable. The risk is that the buyout will be unsuccessful and the exchange of stock will not take place. Risk arbitrage is also used in situations involving reorganizations and tender offers. Also called equity arbitrage.
References in periodicals archive ?
Together, with Jason Caamano, we are committed to working with our colleagues at Cantor to help drive the success of the Risk Arbitrage desk and to being a part of the growth of the overall equities team.
King was a Managing Director of Risk Arbitrage at UBS Securities, focused on event driven sales & trading.
Risk arbitrage to trade an announced takeover deal, including cross currency deals.
The Risk Arbitrage Desk will be fully integrated with Ticonderoga's existing product offerings to provide clients the best and most comprehensive strategies.
The risk arbitrage community, and others, took note.
The Dexia Long Short Risk Arbitrage Fund, which has about EoAeu220 million in assets.
losses detracted from gains and only the Risk Arbitrage Sub-index produced
Hungry for alpha, hedge funds are turning to equity swaps and synthetic prime to access emerging markets offering attractive spreads and easily identifiable risk arbitrage opportunities.
In his role as Head of Risk Arbitrage Group, he was responsible for
Convertible arbitrage, emerging markets, event driven, distressed, event-driven multistrategy, risk arbitrage, fixed-income arbitrage, and multistrategy funds all have skewness coefficients less than zero, in some cases substantially so.
After tracing the evolution of the hedge fund market, he explains how it differs from more traditional investments, and offer tips on profiting from its strategies of risk arbitrage and distressed securities investing.
Exploiting this inefficiency is known as risk arbitrage.

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