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Merger arbitrage, also called Risk Arbitrage is one of the most popular hedge fund strategies. It involves buying the stock of the company being acquired (“the target”) while selling short the stock of the acquiring company (“acquirer”). Normally the acquirer will offer a premium in order to purchase the target company. After a merger deal is announced, the price of the target company usually moves substantially higher to reflect the premium in value being paid by the acquiring company. Despite this increase, the target’s stock may still trade at a relative discount to the final merger value. The discount spread is the profit opportunity which the risk arbitrageurs attempt to capture.

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