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Policy uncertainty is a greater feature of the new US Administration than expected, and has begun to weigh on sentiment for consumers, corporates and investors. Trump’s stance on Russia-Ukraine has forced Germany’s hand into a more aggressive fiscal stance than we have arguably ever seen, improving sentiment around the European region and highlighting its relatively cheap valuation. While there are question marks over the multiplier effect associated with defense spending and the timing of fiscal spending’s impact on the economy, these elements may create unique multi-year opportunities for certain sectors and corporates. Meanwhile, China has seen an inflection in equity market sentiment helped by technological developments like DeepSeek’s latest Large Language Models and a sense that policy action from the government is close by if required. The prospect of greater competition within AI has raised broader questions over the returns that will accrue to US players spending ever-increasing sums on capital expenditure, and has also weighed on US equities.

Persistent uncertainty (particularly when it comes to trade and tariffs), in combination with increasing fundamental doubts creeping in for large cap Tech and heavy positioning entering the year, have led to a higher US equity risk premium, greater volatility and broad deleveraging within the US equity long/short community. With the fact that we’ve observed retail investors adding to positions on dips and prime brokerage reports indicating minimal aggregate de-grossing in US equity long/short balances, there is still a precarious backdrop into which we are adopting a thoughtful approach in capital allocation, with a focus on areas which we feel offer asymmetric risk-reward balances and are less crowded.

O’Connor has always had a significant presence in the merger arbitrage space, and the strategy currently holds the largest allocation within our flagship multi-strategy fund. After facing antitrust headwinds over the past three years, we have a keen eye on the ongoing changes to antitrust policy and enforcement, factors we believe should benefit both M&A activity and merger arbitrage.

As we’ve highlighted previously, we believe that the second Trump administration will bring many policy shifts that may impact the markets in both the short and long term. The most immediate change we’ve seen is within the US regulatory environment, where leadership has transitioned to Trump appointees with real-world antitrust experience and are more aligned with the historical theories of harm that have guided policy for the past 50 years. Both the Assistant Attorney General for Antitrust at the DoJ (Gail Slater) and the new FTC Chair (Andrew Ferguson) have stated that their aim is to avoid bureaucratic delays and reduce review and enforcement-related costs. This new direction, along with what may become chronically reduced staffing levels, should likely lead to fewer tangential extended reviews and help reduce investigations to more reasonable timelines.

Anticipating that the agencies may have to pull back from bringing weaker cases to trial, we believe that they may resume considering settlements, structural remedies and potentially consent decrees as reasonable solutions rather than the binary outcomes typical in the Biden era – approvals or outright suits to block. Fewer Phase 2 reviews and shorter timelines in cases that do receive more scrutiny should help build confidence in a more predictable process and could spur a shift in risk premium back to spreads accreting over time rather than remaining wide until all approvals are in hand as we’ve seen over the past few years.

It’s worth noting that the US is not alone in moving towards less onerous and more predictable antitrust policy. In January, the UK government brought in a new chairperson of their Competition and Markets Authority (CMA), citing their goal of “pro-business decisions to drive prosperity and growth” under the new Labour government.¹ Subsequently, the CMA antitrust head (Sarah Cardell) stated that the body would review fewer global deals with UK touchpoints and would work to cut timelines on some merger reviews in order to speed up decisions and approvals. Likewise in Europe, the European Commission’s new Competition Commissioner (Teresa Ribera), has been tasked with examining current EU guidelines to identify potential changes that might allow EU companies to scale more easily through acquisitions in order to better compete globally.

In our view, a more predictable regulatory setting should benefit both merger arbitrage investors and corporates alike, and we’re confident that deal flow should increase – both in number of deals and in size – in the new antitrust environment. Over the past year we’ve pointed to several key drivers in spurring new deals, including near-record levels of cash on corporate balance sheets, available dry powder in the private equity space, post-pandemic corporate confidence and stable interest rates. As we look ahead in 2025, these factors are still very much in play.

Since the election we’ve seen assets flow into the merger arbitrage space from tactical investors, but there is still far less capital in the space than there was pre-Biden administration. Many multi-strategy “pods” have been reduced or eliminated, and dedicated managers in the space are running smaller AUMs than they were previously. Less capital intermediating deals could help keep spreads wide and potentially drive returns, particularly in large market cap transactions where there isn’t enough arbitrage investment to keep spreads in check during periods of volatility. At the portfolio level, a return to a more normalized antitrust review and enforcement process alongside less capital competing for deals should allow us to upgrade deals sooner according to our risk management system, take larger positions and use higher leverage as we did before 2022 – all factors which could be accretive to performance. In our view, transition periods like Q1 2025 have nearly always brought opportunities for alpha capture, and we’re confident that the Merger Arbitrage strategy will be no different as the market sets up for a resurgence of M&A.

¹ Financial Times, 21 January 2025