Correlation Between Merger Fund and The Arbitrage

Can any of the company-specific risk be diversified away by investing in both Merger Fund and The Arbitrage at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Merger Fund and The Arbitrage into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between The Merger Fund and The Arbitrage Event Driven, you can compare the effects of market volatilities on Merger Fund and The Arbitrage and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Merger Fund with a short position of The Arbitrage. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merger Fund and The Arbitrage.

Diversification Opportunities for Merger Fund and The Arbitrage

0.97

Correlation Coefficient

Merger Fund  The Arbitrage

Almost no diversification

The 3 months correlation between Merger and The is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding The Merger Fund and The Arbitrage Event Driven in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Arbitrage Event and Merger Fund is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on The Merger Fund are associated (or correlated) with The Arbitrage. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Arbitrage Event has no effect on the direction of Merger Fund i.e., Merger Fund and The Arbitrage go up and down completely randomly.

Pair Corralation between Merger Fund and The Arbitrage

Assuming the 90 days horizon Merger Fund is expected to generate 1.35 times less return on investment than The Arbitrage. But when comparing it to its historical volatility, The Merger Fund is 1.07 times less risky than The Arbitrage. It trades about 0.37 of its potential returns per unit of risk. The Arbitrage Event Driven is currently generating about 0.47 of returns per unit of risk over similar time horizon. If you would invest  1,201  in The Arbitrage Event Driven on May 18, 2025 and sell it today you would earn a total of  39.00  from holding The Arbitrage Event Driven or generate 3.25% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

The Merger Fund  vs.  The Arbitrage Event Driven

Merger Fund

Risk-Adjusted Performance

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in The Merger Fund are ranked lower than 29 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Merger Fund is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Arbitrage Event

Risk-Adjusted Performance

High

Compared to the overall equity markets, risk-adjusted returns on investments in The Arbitrage Event Driven are ranked lower than 37 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, The Arbitrage is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Merger Fund and The Arbitrage

The main advantage of trading using opposite Merger Fund and The Arbitrage positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merger Fund position performs unexpectedly, The Arbitrage can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in The Arbitrage will offset losses from the drop in The Arbitrage's long position.

The idea behind The Merger Fund and The Arbitrage Event Driven pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.