The Arbitrage Fund (USD) gained 1.11% in April bringing the YTD return to 3.16% and the rolling annual return to 13.51%.
It is tempting fate to draw attention to such things, but April was the 18th consecutive positive month in the recent performance record of the Arbitrage Fund, an unbroken run that began in November 2008.
There has been a shift in the pattern of the contributions we see from our themes over that period. Given the scale of the change in the investment environment that has taken place in the meantime, this is hardly surprising. Further change is imminent, but not necessarily unhelpful. As we have pointed out previously, legislation to restrict the proprietary trading activities of the US Banks will also limit bank participation in arbitrage. As this report is written in mid May, the US Congress appears to be on the point of enacting such measures.
As in March, Merger Arbitrage produced the best performance, despite widening spreads, particularly on deals in the oil sector. There was a healthy list of strategic acquisitions announced in April such as HP‘s bid for Palm, Hertz’s approach to Dollar/Thrifty, and Shell’s bid for Arrow Energy. Financial buyers are back in the game too: Interactive Data Corporation, CKE Restaurants and Skillsoft have agreed to bids from Private Equity buyers backed by the Banks and Novell is the subject of an approach. This reflects the normalisation of the markets for High Yield and Bank debt, especially in the US, and stands to increase deal activity to a marked extent.
All four of our Fixed Income Arb managers were profitable. Given that the trend in volatility in fixed income reversed sharply in late April, this was a good outcome. Renewed concerns about European Sovereign debt became sufficiently intense that money market and short term interest rate spreads began to widen once more, much as they had done in 2008. The package of measures agreed between the Euro members on May 9th contained measures that will suppress this pressure. But the volatility jolt involved will throw up some interesting relative value opportunities.
The Mortgage Arb theme had a positive month, led by the return from the manager added this month. This fund was added to the portfolio partly as a result of his demonstrable trading skill, which has enabled him to make a strong initial contribution in a month in which Agency Mortgage markets were range bound.
Instrument Arbitrage had a neutral month and Volatility Arbitrage recorded a small loss. However, May has witnessed a sharp reversal in volatility across the board as the news of European structural weakness has brought a measure of dislocation and anxiety to financial markets. After the first two weeks of the month, the net impact of this on the Arbitrage portfolio is negative to the extent of just under 1%.