VH Standard Merger Arb Fund - Quarterly Letter (Q4 '25)
- Robert von Hoffmann
- Feb 20
- 5 min read
Transactions Mentioned In This Letter: None.
YEAR-END RESULTS
Our track record is now going on three years and it’s becoming clear how this strategy can perform over time. Although we have a conservative target, we ended our year up +14.79%, following a return of +1.29% for the 4th quarter of 2025. From the time we started in July 2023, $100 invested in the fund has become $118.68, after all fees and expenses, showcasing the ability to compound.
“Lovely weather so far. I don't know how long it will last, but I'm not afraid of storms, for I'm learning how to sail my ship.” - Louisa May Alcott
LOOKING FORWARD
Going into 2026, my focus is recalibrating. It’s my view that the landscape of merger arbitrage has shifted meaningfully; so shall we.
Since the Great Recession, we’ve had over a decade of low rates and easy financing, ultimately compressing merger arbitrage spreads down to efficient levels. Over the last year, these spreads have become noticeably less efficient. It’s possible the capital has either dried up in the space or there’s not enough to go around. And while this may be backward-looking, as new capital could be finding its way into the strategy today (as it should), it’s my general take that there has not enough capital pursuing these deals, creating this effect.
During the years between 2022 and 2024, we saw one of the toughest regulators since the 1970s. The FTC had a goal of blocking almost all deals with the hope of tempering general M&A activity, while the DOJ was slightly more traditional. Naturally, merger arbitrage became a somewhat out-of-favor strategy with lower expected returns not worth the headaches, so capital left. The pendulum for regulators has since swung the other way, which is one part of the shift.
The other element of this new landscape is that merger arbitrageurs have been gearing more toward regulatory analysis over the last decade or so. Due to the competitiveness of financing in the low interest rates era, it made the most sense to focus on regulatory risk as a baseline for overall transaction risk. My view is that the risk profile of new transactions is changing and merger arbitrageurs will need to adapt once again. At VH Standard, we are placing a significantly greater emphasis on two key factors: 1) the transformational deals, and 2) financing risk, or fundamental deterioration of either the buyer or seller. If you’re not focused on the risks from a fundamental analysis perspective, you are potentially missing a major factor in the deals to come.
Everyone talks about AI as the biggest catalyst to be let loose into our economies, creating a sea of change. That is undoubtedly true; however, we also have a monumental shift in the global economy due to tariffs and the goals of the current U.S. administration. Onshoring and supply chain re-optimization will create new winners and losers. Similarly, shifting consumer demographics and appetites will do the same. Wars and conflicts are changing the global map. Governments’ budgets are under serious reconsideration, which is flipping the modus operandi of the last 15 years. There are plenty of tectonic shifts in the economy right now, and that leaves a tremendous amount of opportunity, as well as risk, in the analysis of the underlying companies and their merged parts.
The irony in this shifting focus lies in our name, VH Standard. The “Standard” intends to pay homage to John D. Rockefeller’s company, Standard Oil, the catalyst for the birth of regulatory reviews. We won’t lose that part of us. It’s still incredibly important. However, we’re going to continue to adapt and evolve as the world changes around us.
LOOKING BACK
From the start of our fund, we have managed through a few different environments. In 2023, we started midyear at the halfway mark. This gave us an opportunity to pick up wider spreads in a few deals that maybe we would not have gotten by investing at the start of those deals - we were comfortable with the deal risk and management’s ability to complete the transactions, so it made sense. These deals included FORG, HZNP, ATVI, VMW, among a few others. In 2024, we discussed how tough the environment was for M&A, something I referred to informally in conversations as a “hurricane season,” where deal activity dries up from heightened regulatory uncertainty and aggressive regulators. The difficult environment led to an abnormally high number of failed deals, extended deal timelines, and fewer transactions in our universe limiting our ability to spread out the uncorrelated risk of each independent deal. Even though we had a negative year in ‘24, I felt we managed the risk appropriately and set ourselves up for the run in 2025.
Throughout last year, I noted what I thought was a massive shift happening in the M&A environment. We went from the 2024 environment (one of the toughest years I’ve ever seen) to one of the most intense economic uncertainties to begin the new year: “Liberation Day” in April. There’s a saying that the market is very good at punishing certainty. In that sense, it was also very good at rewarding those who invested despite the obscure indeterminacy of that moment. Since then, we’ve seen a growing optimism in the M&A world. Interest rates for transactions have been trending downward. GDP growth, which is a significant indicator of deal activity, increased in the second half of the year at a solid rate. Inflation numbers have been okay, although there’s still some fear around the future of purchasing power. And finally, we saw actual deal activity take off at a rapid pace through the second half of the year. While all of this played out over 2025, we laid out our most likely expectations at the beginning of the year, with the most important point being that change was coming to the regulators and the ability to adapt quickly would be a defining factor. Our stated belief was that M&A activity was set to pick up, that we’d see increased competition for deals, and that we would see excess returns above our expectations; this was an opportunity for those nimble enough to take advantage. I even quoted a rare 1988 Berkshire Hathaway letter to shareholders talking about the easy money period of the 1980s for merger arbitrageurs. Not saying that we're purely in the same period today, but deregulation can be meaningfully positive for M&A arbitrage.
It hasn’t always been an easy ride since the start and it was difficult to enter the strategy while everyone else was exiting, but we’ve enjoyed building this together with you. We still have a lot of work navigating the changes that we see ahead. I look forward to sharing new updates as we do just that in the future.
“Great things are done by a series of small things brought together.” – Van Gogh
Please see the attached document for more details about our portfolio and fund, and all disclaimers.
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