Correlation Between Arbitrage Fund and Merger Fund

Can any of the company-specific risk be diversified away by investing in both Arbitrage Fund and Merger Fund 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 Arbitrage Fund and Merger Fund into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between The Arbitrage Fund and The Merger Fund, you can compare the effects of market volatilities on Arbitrage Fund and Merger Fund 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 Arbitrage Fund with a short position of Merger Fund. Check out your portfolio center. Please also check ongoing floating volatility patterns of Arbitrage Fund and Merger Fund.

Diversification Opportunities for Arbitrage Fund and Merger Fund

0.72

Correlation Coefficient

Arbitrage Fund  Merger Fund

Poor diversification

The 3 months correlation between Arbitrage and Merger is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding The Arbitrage Fund and The Merger Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merger Fund and Arbitrage 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 Arbitrage Fund are associated (or correlated) with Merger Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Merger Fund has no effect on the direction of Arbitrage Fund i.e., Arbitrage Fund and Merger Fund go up and down completely randomly.

Pair Corralation between Arbitrage Fund and Merger Fund

Assuming the 90 days horizon Arbitrage Fund is expected to generate 1.03 times less return on investment than Merger Fund. In addition to that, Arbitrage Fund is 1.31 times more volatile than The Merger Fund. It trades about 0.03 of its total potential returns per unit of risk. The Merger Fund is currently generating about 0.05 per unit of volatility. If you would invest  1,732  in The Merger Fund on September 16, 2024 and sell it today you would earn a total of  8.00  from holding The Merger Fund or generate 0.46% return on investment over 90 days.

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

The Arbitrage Fund  vs.  The Merger Fund

Arbitrage Fund

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in The Arbitrage Fund are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Arbitrage Fund is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Merger Fund

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in The Merger Fund are ranked lower than 3 (%) 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.

Pair Trading with Arbitrage Fund and Merger Fund

The main advantage of trading using opposite Arbitrage Fund and Merger Fund positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Arbitrage Fund position performs unexpectedly, Merger Fund 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 Merger Fund will offset losses from the drop in Merger Fund's long position.

The idea behind The Arbitrage Fund and The Merger Fund 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.