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Merger fund aims to top S&P


The BT Quantitative Equity Fund may be a fund marketer's dream - a new equity product that has an interesting story, no peers and a great track record.

BT Quantitative Equity plans to bring a special form of merger arbitrage to retail mutual fund customers willing to invest as little as $2,500. The new Bankers Trust fund will invest in a combination of S&P 500 derivatives or stocks and the stocks of companies which are the targets in acquisitions. While forms of merger arbitrage are common in hedge fund investing, Quantitative Equity appears to be the first mutual fund which will use merger arbitrage coupled with derivatives or stock investing to try to beat the S&P 500.

Bankers Trust described the Quantitative Equity Fund in a registration statement filed with the SEC Dec. 14. A spokesperson for Bankers Trust declined to comment on the new fund, citing securities laws which limit comment while registrations are pending. The prospectus suggests BT plans to introduce the fund in February.

Quantitative Equity's investment goal is to beat the return of the S&P 500 index. That target may not be a long-shot if the past is any indicator. A similar account which Bankers Trust has offered to institutional investors since Dec., 1989 - the BT Pyramid Quantitative Merger Arbitrage Fund - adjusted for costs, beat the S&P 500 five of the last eight years and was ahead of the index through Sept. 30 of this year, according to the prospectus filed with the SEC. The greatest amount by which the Quantitative Merger Arbitrage Fund ever trailed the index was 1.26 percent. That was in 1991, a year when the fund returned 29.30 percent adjusted for expenses.

Once it is available to investors, Quantitative Equity should stand out. Only the Merger Fund, a $365 million no-load fund based in Valhalla, New York, provides retail investors a vehicle for investing exclusively in mergers, according to Morningstar. The Merger Fund, however, largely focuses on merger arbitrage. Beyond that, it primarily keeps assets in cash and does not attempt to match the S&P, according to Merger Fund SEC filings.

The fund has been able to produce reliable returns with disproportionately low risk for an equity fund by investing in companies which are involved in mergers, says Steve Chung, an analyst at Morningstar. Chung said the fund's strategy is unique in the retail world. Some hedge funds use a similar strategy, but leverage their investment through borrowing, Chung said.

Roy Behren, an analyst at the Merger Fund's adviser, Westchester Capital Management, said the Merger Fund aims to reduce market risks rather than match or beat the S&P. The result has been a fund which provides stable returns with a relatively low risk.

Bankers Trust appears to be taking a step beyond the Merger Fund. Like the Merger Fund, Quantitative Equity will invest in companies which are the subject of mergers. But the Quantitative Equity fund also will invest in stocks or derivatives designed to match as closely as possible the S&P 500, according to the registration statement.