Inspired by the recent surge in M&A activity, Deutsche Bank investigates a strategy which systematically invests in stocks that are the target of a publicly announced M&A deal. They find that the strategy has a good historical performance, and conclude that it may be interesting for investors interested in capturing factor premiums.
They also identify two ETFs which specialize in this strategy. We appreciate this idea, but we think there are many open questions which still need to be addressed. It is unclear, for instance, to which extent the performance of an M&A factor strategy may be explained by traditional factor strategies, such as size, value, momentum and low volatility. We also wonder if a long-short instead of a long-only approach would be more suitable for this kind of event-driven strategy.
Our main concern is whether it is really strong enough to improve upon a traditional multi-factor model. The robustness across different markets would also need to be investigated further.
* Deutsche Bank, “The Quant View: Event Driven Merger Premia”, 2 September 2014
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