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GAM Star (Lux) Merger arbitrage

Reasons to Invest

Compelling fixed income alternative

In an environment of low interest rates and credit-spread compression, the harvesting of merger arbitrage premiums can provide alternative sources of meaningful yield with low volatility.

Stable return profile

The team seeks to focus on low spread merger arbitrage opportunities, rather than higher risk deals, thereby aiming to limit the fund’s downside risk and deliver a stable return profile.

Enhanced opportunity set

Tactical investment in spin-offs and index reviews provides access to additional uncorrelated sources of alpha, in a bid to increase portfolio diversification and enhance the overall return profile.

Portfolio diversifier

The fund has relatively low correlation to overall market movements given that its major risk and return driver is the completion of M&A deals.

Our Edge

Proven expertise and approach

Roberto Bottoli has over twelve years’ experience in managing a low risk merger arbitrage strategy and applies his proven approach to a broad opportunity set.

Small- to mid-cap focus

The fund’s bias towards small- and mid-cap deals, which are typically less crowded and with higher spreads than in the large-cap space, enhances risk-adjusted return potential.

Discretionary approach to instrument selection

Payoff analysis seeks to select the most profitable instruments for implementation, thereby optimising the risk/return payoff for each position.

Strict focus on risk management

To minimise downside risk, the manager maintains strict concentration limits, avoids speculation on unannounced events and hedges all currency risk.

Philosophy and Process

Investment Philosophy

The manager believes there are exploitable price inefficiencies in M&A situations. Following an acquisition announcement, investors typically sell the target company, choosing to lock in gains and forego the relatively small remaining upside. By taking a contrarian position, the manager seeks to capture the spread between the target’s current share price and deal price. The merger arbitrage risk is predominantly idiosyncratic and can therefore be effectively diversified. The manager believes that by simultaneously holding a high number of positions and selecting M&A situations with the most rewarding risk/return profile in the low spreads’ space, attractive risk-adjusted returns can be delivered independent of market direction.

Investment Process

The manager uses a bottom-up approach to identify suitable deals across a diversified global universe. Quantitative screens narrow approximately 1,000–2,500 merger arbitrage deals per year to 150-300 potential investments. The manager conducts payoff analysis by establishing the deal closing horizon and calculating the expected return, while proprietary tools determine if this return can be enhanced through the use of options. Based on this analysis, the manager selects the most profitable structure for each deal. The resulting portfolio is diversified across 60-80 positions. The merger arbitrage strategy is the core allocation (approximately 80–90%) with the remainder comprised of tactical allocations in spin-offs and index reviews.

1. Universe screening

  • Global universe; market cap >USD 200 million
  • Exclude hostile M&A deals
  • Focus on deals with 2-5% arbitrage spread

2. Position setup

  • Merger arbitrage – long only or long/short positions; options
  • Spin offs – buy shares and sell index derivatives or basket of shares
  • Index reviews – buy/sell shares and sell/buy index derivatives

3. Portfolio and risk management

  • Strict concentration limits
  • Positions typically equally weighted
  • Sell M&A deals with spreads below Libor

Investment Team

The fund is managed by Roberto Bottoli, an experienced merger arbitrage investor with 19 years’ investment experience and a proven merger arbitrage track record.

Roberto is supported by Jonathan Stanford. They are part of GAM’s non-directional equity team, which is led by CIO Gianmarco Mondani and comprises an additional nine investment professionals. The team has built a successful track record in long/short equity investing since 2002, managing a range of low volatility, liquid and transparent absolute return funds.

The team is based in Lugano, Switzerland and were formerly Arkos Capital SA, which was acquired by GAM in July 2012.

We believe that a diversified and conservative risk arbitrage strategy can deliver attractive risk-adjusted returns independent of market direction
Roberto Bottoli, Investment Director.

Fund Information

Key Risks

Counterparty Risk / Derivatives

If a counterparty to a financial derivative contract were to default, the value of the contract, the cost to replace it and any cash or securities held by the counterparty to facilitate it, may be lost.

Leverage Risk

Derivatives may multiply the exposure to underlying assets and expose the Fund to the risk of substantial losses.

Currency Risk

The value of investments in assets that are denominated in currencies other than the base currency will be affected by changes in the relevant exchange rates which may cause a decline.

Equity

Investments in equities (directly or indirectly via derivatives) may be subject to significant fluctuations in value.

Capital at risk

All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

Resources

Fund Profile - GAM Star (Lux) Merger arbitrage

Risk management at GAM

Contacts

GAM Star (Lux) SICAV - Merger Arbitrage is a sub-fund of GAM Funds, registered office at 25, Grand-Rue, L-1661 Luxembourg, an umbrella investment company.