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January 5, 2009

The Return of Arbitrage in 2009

One of my takes for 2009 is that arbitrage will start to work again. As most readers will know, convertible arbitrage blew up in 2008, partly because of credit issues.

But that wasn't the only arb strategy that blew up. Merger arb was a mess as well, through a combination of busted deals and absentee traders. Further closed-end fund discounts went out to record levels, and while that came back somewhat toward the end of the year, many funds are trading at big discounts to their historical (I know, I know) levels.

So, will 2009 mark the return of arbitrage traders and the closing of some of these discounts/premia/disconnects? I think so, but I'm happy to hear other views, skeptical or otherwise.

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