O’Connor Global Multi-Strategy Alpha Monthly Letter

The US elections dominated market conversations in November as the Republican party won decisively, with Donald Trump becoming only the second Republican to win the popular vote since 1988. In the subsequent weeks, we have seen the President-elect begin to nominate candidates for various cabinet positions, which has created plenty of sector-level volatility, particularly in areas relating to trade and healthcare. Still, the notion of US exceptionalism in financial markets has continued gaining traction, strengthening the US dollar and driving flows out of both developed and emerging markets and into the US.

One of the significant changes we anticipate on the back of this change in government will be the outlook for mergers and acquisitions (M&A), and we have increased exposure to our Merger Arbitrage book over the past few months on positive signposts for the space. The most obvious policy change with the greatest potential impact to M&A would be in antitrust enforcement. We expect that both Jonathan Kanter (Assistant Attorney General/Antitrust, Department of Justice) and Lina Khan (Chair of the Federal Trade Commission, FTC) will step down around the inauguration, and we anticipate that the new administration will replace both roles with candidates who may be more aligned with the “consumer welfare standard” that has guided US antitrust regulation for the past 40 plus years. No potential candidates have been mentioned for these seats yet, and we will be interested to see the degree of antitrust experience that the new nominees have compared to their political ambitions.

From a policy perspective, we are looking for a number of changes that could ease the recent hurdles faced by parties in antitrust review, particularly in vertical transactions. Under new leadership, we anticipate that the agencies will conduct fewer investigations into “novel” theories of harm, which often lead to Phase II requests, and which have drawn deal timelines out considerably over the past few years. We would also expect fewer suits to block transactions (particularly on novel grounds), and instead see greater reliance on structural or behavioral remedies and consent decrees, which the current FTC has stepped away from. Each of these changes would help in truncating deal timelines, which have extended considerably over the past two years. More importantly, we would be playing on a better-defined field with more transparent rules, which could embolden companies in moving forward with new transactions. Greater certainty around regulatory approval should be additive to today’s environment of stable to falling rates, robust markets and strong fundamentals for companies looking to acquire growth or break into new markets.

As the perceived regulatory risk in the market declines, we could also see average deal spreads compress. Since Q3 2021, average spreads have been consistently higher than pre-pandemic levels, as per UBS Investment Bank, which we believe was due largely to the more opaque process and lengthy timelines of antitrust reviews. It remains to be seen how long it will take for the current risk premium in the market to narrow, and we believe that there will be some degree of “show me” from market participants wary of the incoming president’s reputation for unpredictable decisions. Installing experienced leadership at both the FTC and DOJ will certainly help the merger arbitrage community regain confidence in the regulatory process and may allow us to be more aggressive in upgrading deals in our risk management system and managing larger position sizes under our deal grading scheme.

As mentioned last month, we had de-risked exposure coming into the US elections and are happy with the way the fund navigated that binary event. In the back half of November, we faced a few headwinds as the “Trump bump” faded and we experienced weakness in our Asia Broad, China Long/Short and Emerging Market Long/Short books. Our Event Driven strategies also lost ground despite spreads narrowing somewhat on election enthusiasm, as a few deals with regulatory deadlines widened on concern that the outgoing antitrust administration might attempt to block transactions on their way out. The Energy Transition Long/Short space added to performance on strength in industrials and fossil fuel-related names, and the European Long/Short book rallied thanks to a strong performance from retail and macro sleeves.

While we remain in a period of information discovery when it comes to the new US government and trade policy, we think sector winners and losers are emerging. We have identified a number of new higher conviction short-term opportunities and so have increased both gross and net exposure. More broadly, the election results have reduced uncertainty for corporates, and we believe that the anticipated backdrop of greater deregulation should lead to more active capital markets, which should be a positive flywheel effect for our investment teams.