In this in-depth conversation, Corey Hoffstein breaks down merger arbitrage as a distinct risk premium rather than a true arbitrage strategy. He explains how investors can capture the residual spread in announced M&A deals, compares merger arbitrage to traditional credit markets, and discusses why it can offer a low-correlation return stream relative to stocks and bonds. The discussion also explores how return stacking and portable alpha frameworks can enhance portfolio efficiency, positioning merger arbitrage as a powerful diversifier—particularly as an alternative to credit risk within modern portfolio construction.

Topics Discussed

1. Defining merger arbitrage as a risk premium for bearing deal break risk and the time value of money
2. The concept of Return Stacking to add diversifying strategies without selling core assets
3. Comparing the idiosyncratic nature of merger arbitrage risk to the more cyclical credit risk found in corporate bonds
4. Utilizing a combination of Treasuries and merger arbitrage as a direct alternative to corporate bond allocations
5. Addressing the behavioral challenges of traditional diversification by reducing tracking error against standard benchmarks
6. The argument for merger arbitrage as a persistent and unique risk premium, distinct from alpha-seeking strategies
7. Overcoming the historical packaging and adoption challenges of merger arbitrage funds for financial advisors
8. Democratizing institutional investment concepts like portable alpha for a wider audience

Definitions

Alpha: refers to returns above that of a passive market benchmark

Tracking error is the variability in the difference between a strategy’s returns and the investor’s benchmark returns.

Beta: How much an investment moves vs. a benchmark (like the market).

Duration refers to the average life of a debt instrument and serves as a measure of that instrument’s interest rate risk.

A Basis Point is equal to 0.01% and is commonly used to express changes in interest rates, fees, or investment returns. For example, 50 basis points equals 0.50%.

Leverage Risk. As part of the Fund’s principal investment strategy, the Fund will make investments in futures contracts. These derivative instruments provide the economic effect of financial leverage by creating additional investment exposure to the underlying instrument, as well as the potential for greater loss. You could lose all or substantially all of your investment in the Fund should the Fund’s trading positions suddenly turn unprofitable. The net asset value of the Fund while employing leverage will be more volatile and sensitive to market movements. Stacking does not guarantee outperformance and diversification does not guarantee a profit or prevent a loss.

Merger-Arbitrage Risk. Merger-arbitrage investing involves the risk that the outcome of a proposed event, whether it be a merger, reorganization, or other event, will prove incorrect and that the Fund’s return on the investment will be negative, or that the expected event may be delayed or completed on terms other than those originally proposed, which may cause the Fund to lose money or fail to achieve a desired rate of return.

Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. For a prospectus or summary prospectus with this and other information (including complete disclaimers) about the Funds, please visit https://www.returnstackedetfs.com/rsba-return-stacked-bonds-merger-arbitrage/. Read the prospectus or summary prospectus carefully before investing. Investments involve risk. Principal loss is possible. Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. Brokerage commissions may apply and would reduce returns.

Tidal Investments, LLC (“Tidal”) serves as investment adviser to the Fund and the Fund’s Subsidiary. Newfound Research LLC (“Newfound”) serves as investment sub-adviser to the Fund. ReSolve Asset Management SEZC (Cayman) (“ReSolve”) serves as futures trading advisor to the Fund and the Fund’s Subsidiary. Foreside Fund Services, LLC is the distributor for the Fund. Foreside is not related to Tidal, Newfound, or ReSolve.