“Get a merger companies list” says the lady behind you as you wait for a self-checkout station to free up. Not knowing much about merger arbitrage you ask, “what is the minimum investment in arbitrage?” Her eyes widened with excitement and this is what she tells you …
What is the Minimum Investment in Arbitrage?
There is no minimum investment in arbitrage. Arbitrage transactions can require a substantial investment to capitalize on the spread, or pricing discrepancy, of an asset.
There are event driven arbitrages that require a few thousand dollars to participate, while other opportunities can only be accessed with several million dollars. The type and number of arbitrage investments, the strategy employed, the size of the price differential, transaction fees, and position size will determine the minimum investment.
There may be peripheral costs such as the upfront investment in proprietary software and research data needed to execute your chosen strategy.
What is the minimum investment in arbitrage? Arbitrage involves simultaneously buying and selling an asset in different markets to profit from the price differential, so market conditions will be a major influence on the minimum investment required.
Does Arbitrage require Initial Investment?
Yes, arbitrage requires an initial investment. To profit from the buying of an asset in one market and selling the asset in another market or selling the asset in the same market after a favorable price movement, requires purchase-and-sale participation. The participation dollars are the initial investment.
The initial investment is dependent on not only the specific arbitrage opportunity and market climate but also trading commissions, payable interest if margin is used, and exchange fees.
What is the minimum investment in arbitrage? Arbitrage is a lucrative risk/reward pursuit that requires an initial investment to exploit the price spread facilitated by an event-driven corporate action.
How Do You Invest in Arbitrage?
You invest in arbitrage by identifying opportunities, assessing risk and costs, developing a strategy, staying informed, and monitoring performance. Here’s the investing synopsis:
Opportunity Identification – Identify and research arbitrage investments in different markets spanning different exchanges. You’re looking for price spreads precipitated by temporary market gyrations, or regulatory or geographical changes.
Risk / Cost Profile – Arbitrage is a risk-riddled endeavor. Assess the risks associated with your short list of investment candidates. Regulatory requirements and potential changes, current market conditions and expected volatility, and liquidity restrictions are a few of the systemic risks to be considered and thoroughly researched.
Your due diligence must include accurate calculations of trading, exchange, and peripheral fees, and applicable financing costs. This is imperative to determine your initial investment and the potential net profit.
Strategy – Develop a well-defined, analytically based strategy. Your arbitrage strategy must have a beginning, middle, and exit that is well-funded and predicated on the determination that the associated risks are identifiable, manageable, and survivable.
Stay Informed / Monitor Performance – Monitor the performance of your arbitrage investment. Track your strategy effectiveness and anticipate areas of potential loss in relation to staying informed about macroeconomic conditions. Yo-yo economic indicators, schizophrenia Federal Reserve mandates, and bi-polar market euphoria and depression are systemic circumstances that impact investment success.
What is the minimum investment in arbitrage? There is no minimum investment in arbitrage because the initial investment is opportunity, selected strategy, cost, and market condition- dependent.
Read next: What is the Average Merger Arbitrage Spread?
