CNN Money – Thanks to a spate of blockbuster deals, hedge funds that bet on mergers are on a tear, making almost as much money in the opening weeks of 2006 as they did in all of 2005.<\/p>\n
These hedge funds use a strategy known in the business as “merger arbitrage” or “risk arbitrage,” meaning they seek to profit from the “spread” between the current market price of a company being acquired and the price once a deal has gone through.<\/p>\n
Managers of these funds, which are private, lightly regulated investment vehicles for wealthy people and institutions, usually buy the stock of the company being acquired while betting against the acquirer.<\/p>\n
The “risk” in risk arbitrage refers to the chance that a deal may not close on time, or at all, which would cause the target company’s price to drop.<\/p>\n
Justin Dew, senior hedge fund analyst at Standard & Poor’s, said that January was the busiest month for mergers since January 2000, owing to such blockbuster deals as Boston Scientific’s $27 billion bid to buy rival medical device maker Guidant and Disney’s plans to snap up Pixar for about $7.4 billion.<\/p>\n
And the deals that have been announced this month — AT&T agreeing to buy Bell South, McClatchy inking a deal for Knight Ridder, and Capital One announcing a merger with North Fork — give new meaning to the phrase “March Madness.”<\/p>\n