One of the little ironies of our business is that, before there can be any arbitrage , there first needs to be some pending mergers to analyze. Understanding trends and developments in the merger and acquisition environment is key to predicting the tenor of the coming year in risk arbitrage. Every January, I try to review the trends of the previous year and project what the coming year may bring. Like any predictive exercise, there is no guarantee that I'll be right, but maybe we can ferret out some ways to profit from this exercise, even if risk arbitrage isn't something you personally engage in. After all, part of a successful investment program, it's hoped, involves owning the odd takeover bid recipient from time to time.
Risk arbitrage is a reactive business.
You can't create your own opportunities, and unlike traditional investing, you don't have a limitless pool from which to choose your investments. Our options are finite, and they vary according to the financial and psychological conditions that give rise to new merger announcements. Year 2000 was seminal in many respects. For the first time in a decade, the market finished lower. Also, for the first time in many years, merger and acquisition activity appears to have declined.