Inhedge funds, aninvestment strategyrelated tomergers and acquisitionsinvolving thepurchaseand/orshortingof an acquired companysstock. In a cash merger, the stock of the acquired company often trades below theoffer priceuntil the deal is completed. A hedge fund may buy at the lower price and wait for the deal to be completed, at which point it makes a profit. In a stock-for-stock merger, the acquiring company (with more valuable stock) offers to exchange the acquired companys stock for its own at a certain ratio. A hedge fund may thenshort sellthe acquiring companys stock while simultaneouslybuyingstock in the acquired company. When the deal goes through, the acquired companys stock is converted and the new stock returned to the owner from which the hedge fund borrowed. In both these situations, the primaryriskis the possibility that the deal may fail in the middle of the hedge fundstransactions. See also:Exchange ratio.
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