\n(Daily Alts) In this video, Steve Gerbel explains merger arbitrage by making an analogy to air travel: \u201cThey say the safest place for an airplane is in the hangar, but that\u2019s not what airplanes are for,\u201d he says. When we fly, we want the reward of air travel, and we\u2019re willing to take on some risk in pursuit of that reward \u2013 but we want the risk to be as minimal as possible. This, according to hedge-fund expert Mr. Gerbel, is what the SilverPepper Merger Arbitrage Fund does: it seeks the highest rewards for the least risk.<\/p>\n
What is merger-arbitrage? Mr. Gerbel explains with an example of a stock trading at $8.50. When another firm announces its intention to acquire it at $10 per share, the share price of the acquisition target might rise to $9.70 \u2013 the remaining $0.30 reflects the uncertainty that the deal might not go through, and this is where arbitrage comes in. By buying shares of the acquisition target after the announcement but before the deal is closed, SilverPepper seeks to make a predictable $0.30 gain on the deal. \u201cDime after dime,\u201d this adds up.<\/p>\n
According to Mr. Gerbel, 96% of all announced mergers have closed, but his firm still undertakes extensive research before entering a trade. Mr. Gerbel likens this to a pre-flight checklist to ensure an airplane is safe to fly.<\/p>\n