Bloomberg revealed a strategy that made 22% annually over the past 6 years by shorting takeover rumors. There were 1875 takeover rumors during the past 6 years- that’s more than one takeover rumor per trading day. By forming a rolling portfolio that’s short in companies that are takeover targets and that’s long the S&P 500 index, one could have achieved a 22% annual return. Since the portfolio will have around 20 companies in it, there is adequate diversification as well.
But this strategy can still be improved. It’s possible to develop a model which excludes those stocks which have the highest probability of being acquired. Portfolio managers and analysts can use their judgments to include the stocks with the most ridiculous rumors as well. On the long side of the portfolio, there are several strategies that can yield better returns than the dumb index investing. We have mentioned previously that monkeying insider purchases managed to beat the index funds by about 7 percentage points per year.
Bloomberg reports that only 14.5% of the companies were acquired. The stocks that were the subject of takeover speculation initially jump by 2.9 percent but lose 1.2 percent in the next month.