Characteristics of Risk and Return in Risk Arbitrage

Using the available disclosed information on the cash and stock swap mergers and acquisitions and data of financial results of the companies involved into M&A deals in Russia, I produce a comprehensive analysis of the merger arbitrage investment strategy with a significant exposure to theoretical background. The study provides analysis of the underlying merger arbitrage assumptions in full extent: transaction costs, stock’ illiquidity characteristics, and initial amount of the fund with the direct application to Russia and Russian stock market, which has not yet been done before. Nevertheless, in addition to simulating a hedge fund investment strategy in Russia with the use best practices from previous academic researches on risk arbitrage, I contribute a classification analysis, which provides arbitrageurs with a statistic measure for decision making in undertaking a risk arbitrage transaction primarily when purchasing target – due to results of my research there are 5 company’s financial variables that have a strong discriminating power between successful targets and successful bidders. As well, I outline the most significant risk arbitrage return scenarios and exhibit the return which mostly typical for a simulated hedge fund in Russia under a defined set of assumptions.