Uploaded March 2026 | Updated September 2026, 1 week ago
In this session, we focus on strategies that are often labeled as “arbitrage” but are really speculative, risky strategies that may or may not generate excess returns. First, we look at paired arbitrage, a practice of finding two companies that have historically moved together, where the current price relationship is not consistent with historic norms. While the strategy has made money for investors over time, the evidence suggests that the returns have come with risk and that the excess returns have faded over time. Second, we examine “merger arbitrage”, the practice of buying target company shares after a merger/acquisition is announced, hoping to make money from the price being higher when the deal is consummated. Again, while the returns are generally positive, it is exposed to the risk that the acquisition may fail, causing the stock price to drop back to pre-announcement levels. With speculative arbitrage strategies, we note the importance of adjusting borrowing (financial leverage) to reflect the risk in the strategy. We close the session by looking at hedge funds, noting three findings: that they have historically generated higher returns, given their risk exposures, than the rest of the market, that these higher returns come from a few big hedge fund winners (rather than from overall consistency) and that the worst hedge funds usually go out of business.
Playlist for class (Intro + 42 sessions): youtube.com/playlist?list=PLUkh9m2BorqnZGADa8cTzeJblmrZY_SqP&si=zI2pk17pJeld4nWR
Slides: https://www.stern.nyu.edu/~adamodar/pdfiles/invphilslides25/session29.pdf
Post-class test: https://www.stern.nyu.edu/~adamodar/pdfiles/invphilcertificate/postclass/session29test.pdf
Post-class solution: https://www.stern.nyu.edu/~adamodar/pdfiles/invphilcertificate/postclass/session29soln.pdf
In this session, we focus on strategies that are often labeled as “arbitrage” but are really speculative, risky strategies that may or may not generate excess returns. First, we look at paired arbitrage, a practice of finding two companies that have historically moved together, where the current price relationship is not consistent with historic norms. While the strategy has made money for investors over time, the evidence suggests that the returns have come with risk and that the excess returns have faded over time. Second, we examine “merger arbitrage”, the practice of buying target company shares after a merger/acquisition is announced, hoping to make money from the price being higher when the deal is consummated. Again, while the returns are generally positive, it is exposed to the risk that the acquisition may fail, causing the stock price to drop back to pre-announcement levels. With speculative arbitrage strategies, we note the importance of adjusting borrowing (financial leverage) to reflect the risk in the strategy. We close the session by looking at hedge funds, noting three findings: that they have historically generated higher returns, given their risk exposures, than the rest of the market, that these higher returns come from a few big hedge fund winners (rather than from overall consistency) and that the worst hedge funds usually go out of business.
Playlist for class (Intro + 42 sessions): youtube.com/playlist?list=PLUkh9m2BorqnZGADa8cTzeJblmrZY_SqP&si=zI2pk17pJeld4nWR
Slides: https://www.stern.nyu.edu/~adamodar/pdfiles/invphilslides25/session29.pdf
Post-class test: https://www.stern.nyu.edu/~adamodar/pdfiles/invphilcertificate/postclass/session29test.pdf
Post-class solution: https://www.stern.nyu.edu/~adamodar/pdfiles/invphilcertificate/postclass/session29soln.pdf
