The investment philosophy of the Diversified Arbitrage Fund is to invest in a diversified portfolio of arbitrage and alternative investment strategies including merger arbitrage, convertible arbitrage, and other kinds of arbitrage or alternative strategies. The Fund tactically tilts the asset allocation within the portfolio based upon market conditions and the best anticipated risk-adjusted returns.

Merger Arbitrage

The intuition behind this strategy is to capture a liquidity and deal failure risk premium.

• When a merger is announced, the stock price of the target generally trades at a discount to the consideration offered by the acquirer until the deal closes.
• The discount reflects the tension between the likelihood that the deal will close at the stated terms and the willingness of holders of the target’s stock to sell at a discount to lock in gains and avoid the risk that the deal fails to close.
• Arbitrageurs provide liquidity to holders of target stocks who often sell after a merger or other corporate event is announced.

Basic implementation:

• Take long position in the target company and a short position in the acquirer (stock only deal).
• The Fund will invest in deals based on the expected risk-adjusted return for the arbitrage transaction.
• Generally, the Fund will invest soon after the announcement of the merger transaction and in most cases will hold the stock until the deal is completed.

Convertible Arbitrage

The intuition behind this strategy is to capture a liquidity premium.

Convertible bonds are usually sold at a discount to their components (bond + option) due to illiquidity. Convertible bond buyers hope to earn a liquidity premium for holding an illiquid asset and providing financing for companies that would otherwise have difficulty borrowing.

• The return premium for convertible arbitrage is compensation for liquidity risk and the risk that the value of a convertible bond fails to converge with component parts – or, stated another way, that investors are forced to liquidate positions before this convergence occurs.

Basic implementation:

• Take long position in the convertible bond and a short position in its underlying common stock.
• Re-hedge the position as the underlying stock price and/or economic conditions change.
• Generally, the holding period for an investment by the Fund in a convertible arbitrage trade will be longer than a year, and could be up to several years for some convertible bonds.

Dual-Class Arbitrage

This strategy takes advantage of inefficiencies in the prices at which different classes of a publicly traded company’s stock are trading.

When-Issued Arbitrage

This strategy takes advantage of inefficiencies in the prices at which a parent’s and subsidiary’s stock are trading on a "when-issued" basis immediately prior to the spin-off of the subsidiary.

Stub-Trading Arbitrage

This strategy takes advantage of inefficiencies in the prices at which a stock of a publicly traded parent corporation and its publicly traded subsidiary are trading.

Special Purpose Acquisition Companies (SPACs)

SPACs, often called "blank check" companies, are publicly traded companies that have raised money to make an acquisition, and whose primary asset is a trust invested in short-term high-grade securities. The Fund seeks to capture a liquidity premium when these securities, which are typically thinly traded, are selling at a discount.

Distressed Securities

This strategy purchases securities of firms which are in or near distress and trade at discounts to fundamental value.