Understanding the Investment Methodology of ARBFX



ARBFX’s investment methodology

The Arbitrage Fund Class R (ARBFX) is an alternative mutual fund that relies on arbitrage opportunities to generate profit. R class funds usually do not carry any front-end or back-end charges, but have an initial front load to attract retail investors. Operating expenses may vary significantly from one fund family to another.

The graph above compares the NAV (net asset value) YTD (year-to-date) performance of ARBFX with that of similar funds that use a similar strategy, The Merger Fund Class V (MERFX) and The AQR Diversified Arbitrage Fund Class I (ADAIX).

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Performance comparison

ARBFX has been the top performer among the three alternative funds. MERFX and ADAIX have both fallen, with total YTD returns of -1.7% and -5.2%, respectively. During corporate stock-to-stock mergers, a merger arbitrageur buys the stock of the target company while shorting the stock of the acquiring company, since the stock price of the target company usually remains somewhere below the acquisition price. This discount is mainly due to the market’s uncertainty about whether the merger will occur or not.

Valuation multiple

The average PE (price-to-earnings) ratio of ARBFX is 34.3, which is 27% higher than that of funds with similar holdings. Also, the average price-to-cash flow and price-to-sales ratios are 12.9 and 1.7, respectively. Williams Partners (WPZ), AbbVie (ABBV), Harris (HRS), and Jazz Technologies (JAZZ) are some of ARBFX’s top holdings. A detailed holdings analysis of ARBFX is presented in the next part of this series.


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