Allen & Co. Shuts $850 Million Arbitrage Fund

  • Firm was one of the first to roll out the merger strategy
  • Bank to make long-term stock investments for clients instead

After 40 years of betting on corporate takeovers, Allen & Co. is calling it quits.

The New York-based investment bank, known for the annual media and communications conference it holds in Sun Valley, Idaho, is shuttering a merger arbitrage strategy it began offering clients in 1975. The firm will instead invest client money in long-term stock bets, said Kim Wieland, chief financial officer for Allen Investment Management, the company’s money-
management arm.

Allen is closing the strategy in part because of declining returns for such funds, which have been hurt by increased competition and low interest rates. The firm’s main business is underwriting securities sales and advising on mergers and acquisitions, along with a wealth-management arm focused on the fortunes of technology billionaires that Allen & Co. started in 2009. 

“There was a heyday in the ’90s and there are still a lot of funds that do it as one of their core strategies,” said Louis Meyer, an event-driven analyst at Oscar Gruss & Son, a merger arbitrage pioneer. “But it’s not the sexy business it used to be.”

Once a merger is announced, shares of the target company typically trade below the price offered by its suitor, a discount that reflects the risk that the deal will fall through or take longer than expected to complete. Arbitrage funds seek to profit from this spread by purchasing shares in the target company, a strategy that produced returns approaching 20 percent a year during the 1980s and ’90s, according to Meyer.

Lower Returns

Nowadays, returns are much lower even with the rising volume of deals being announced. Merger arbitrage funds on average returned 1.7 percent last year, and haven’t gained more than 5 percent in any year since 2009, according to Hedge Fund Research Inc. in Chicago. The funds received net inflows of about $340 million during the first six months of this year, raising their total net assets to $20.49 billion.

Allen & Co., founded in the 1920s by brothers Herb and Charles Allen, underwrites securities sales and provides merger advice. Since the early 1980s, the firm has held its annual Sun Valley conference, where top media and communications executives can vacation and schmooze with billionaires. Attendees have included Warren Buffett, Rupert Murdoch and the late Steve Jobs. 

On the asset-management side of the business, Allen & Co. offered the merger-arbitrage strategy for clients who established separate accounts. In 1995, the firm rolled the strategy into a fund initially called Allen Arbitrage and later renamed Allen Global Partners. The fund, which currently makes credit-related investments along with the arbitrage trades, had $848 million in assets as of Dec. 31.

Allen Global Partners began returning capital to investors in May, according to Wieland, a move the money-management unit disclosed in an Aug. 31 filing with the U.S. Securities and Exchange Commission. The process is about 95 percent complete, Wieland said in a telephone interview last week.

Allen & Co. and its principals own more than 25 percent of the fund’s domestic version, so the return of capital will provide the firm with money to invest in other businesses.

Technology IPOs

Under Herbert Allen III, the grandson and grand-nephew of founders Herb and Charles, the firm has expanded into investment banking for technology companies, helping to underwrite initial public offerings by Google Inc. and Twitter Inc. In 2009, Allen & Co. started a private wealth-management business overseeing the personal fortunes of technology entrepreneurs.

The merger arbitrage fund has performed well over the years, according to Wieland. But as more money chases the same opportunity, stocks are trading closer to prices of pending takeovers, leaving less room for profit.

“The spreads are so thin now,” Wieland said. “We did not think the opportunities were there for us to deliver the kinds of returns that we feel are appropriate for investors.”

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