The spike in global M&A activity over recent months has presented a welcome reawakening of opportunity for pairs trading specialists.
Hedge funds, in particular, have been noted taking a strong interest in risk arbitrage situations that have emerged from putative deals such as Kraft / Cadburys. Deutsche Bank analysts are predicting that European M&A deals are likely to double in 2010, following two years of stagnation.
Deutsche's latest equity research report specifically highlights the implications of the anticipated currency backdrop, with a weak sterling and strong euro likely to trigger cross-border M&A activity as UK companies become more attractive to eurozone predators.
However the cross-border nature of many of these risk-arb opportunities has brought the age-old issue of currency risk to the fore. Intra-day currency fluctuations mean that traders are faced with the challenge of either having to mitigate their currency risk via manually executing FX trades through the day or run the risk of waiting to perform a once-only hedge at the end of the day and, potentially, seeing profitable trades turn into loss-makers.
Now, however, there is a solution: AlgoTrader has, via its SpreadHawkTM EMS, developed a unique system that allows traders to automatically hedge their currency exposures on cross-currency pairs trades in real-time. And because the FX component is completely automated it also reduces costs and eliminates time-lags, thereby increasing both the frequency and the profitability of potential risk-arb opportunities.
Simon D. Bell, Director of Execution Services at AlgoTrader commented: "It always seemed incredible to us that there's never been an efficient way for traders to hedge the currency risk of cross-border pairs trades in real-time. So despite presenting some great trading opportunities, the recent upturn in M&A activity has also been causing some big FX problems, especially given recent currency volatility.
We decided to tackle this issue and, because of the inherent flexibility of our existing SpreadHawkTM architecture, we were able to develop a robust, fully-integrated system very quickly. From what clients are telling us it's clear that we've hit on the solution to one of their biggest trading headaches by providing a one-stop-shop for cross-currency pairs execution."