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Hedge Fund Investors Have Fallen in Love With Merger Arb (Again)

  • Outperformance may be short-lived as deal flow slows
  • Paulson & Co., Manikay have raised new funds to bet on deals

With hedge funds losing money and bleeding assets, a handful of firms and clients are pinning their hopes on corporate marriages -- just as the best returns might be behind them.

Billionaire John Paulson’s Paulson & Co., Manikay Partners, a $1.9 billion firm led by Shane Finemore, and Arrowgrass Capital Partners have all raised new funds to speculate on corporate mergers, saying the return expectations are higher than they’ve been for years, according to people familiar with the firms. Multistrategy firms like Taconic Capital Advisors, Farallon Capital Management and Och-Ziff Capital Management LLC have also increased their allocation to mergers.