(Bloomberg) -- With the deal market showing signs of life, a couple of standalone merger arbitrage funds have emerged to bet on the anticipated activity after a long dormancy last year.

Taconic Capital Advisors, which has invested in merger arbitrage since its 1999 inception, opened a single-strategy fund this month aiming to raise as much as $1 billion, according to regulatory filings and a person familiar with the situation. 

And Charles Slotnik, who has been doing merger arbitrage for more than three decades, disclosed last month that he’d raised some $260 million for a standalone fund since spinning off from an investment unit of Koch Industries Inc. early last year. 

Private equity managers are sitting on trillions of dollars in dry powder, would-be corporate acquirers have regained some confidence in the economy and lawyers are figuring out how to navigate the Biden administration’s antitrust efforts. That’s fueling hopes for a turnaround after a dismal 2023.

“Now that we have a healthy, robust stock market, it eliminates some of the skittishness companies had about doing deals,” Slotnik said in an interview. “The regulatory environment from Washington has become a lot more clear.”

A Taconic spokesperson declined to comment. 

The Taconic Merger Arbitrage Fund will be run by Margaret Jones, who has handled the same strategy within the firm’s opportunity fund since July 2014, the person familiar said, requesting not to be identified because some details for the new offering haven’t been made public. 

Merger Upswing

Over the past year, merger arbitrage investors have adjusted their playbook as the Biden administration pursues an aggressive antitrust agenda, threating to derail some of the largest corporate combinations. While traders endured a stretch of heightened volatility, many deals eventually overcome regulatory objections and delivered decent returns for their wagers.

While a flurry of big mergers were announced in January, expectations have cooled this month — in part because of uncertainty as to when and how much the US Federal Reserve will cut interest rates. 

Read More: Arb Traders See Slow Deal Revival Amid Rates, Antitrust Worries

Once takeovers are announced, merger arbitrage practitioners wager on whether the deals will go through and seek to profit from the spread — the difference between the offer and the stock price, reflecting the prospect of success and the risk of failure. These days, the craft is mainly pursued by money managers that have numerous strategies at their disposal, including event-driven and multimanager hedge funds. 

Many standalone merger arbitrage managers shuttered after their funds — which are supposed to protect investors during down markets — had a string of losses during the tech market crash of 2001, the financial crisis of 2008 and then again in 2011. 

“A lot of dedicated merger arb managers just stopped playing,” said Jonathan Caplis, founder of hedge fund research firm PivotalPath. “You have rarely seen substantial launches since then.”

Standalone merger arbitrage funds also have several practical drawbacks, Caplis said. Because dealmaking goes in cycles, it’s hard for a standalone fund to make money when things are slow. Another obstacle is that potential losses from merger arbitrage can be much larger than the potential gains.

Slotnik began his career as a business reporter at CNN, covering some of the biggest deals of the late 1980s and early 1990s. He then went to work on Wall Street for firms such as Wyser-Pratte Management, Carlson Capital and most recently, Spring Creek Capital, part of Koch Industries.

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