I was astounded to find that, as of 12/05, Yale Endowment had a 25% target allocation to "Absolute Return" strategies (such as those used by ARBFX & PAEDX) and only 5% to bonds. Source:

www.yale.edu/investments/Yale_Endowment_...

That 2005 Annual Report says, "Over the 10-year period ending 6/30/05, the [whole] Endowment earned an annualized 17.4 percent return, net of fees, placing it in the top one percent of large institutional investors.

Here's another key quote from p. 20 of the Yale Endowment 2005 Annual Report:
"The [absolute return] portfolio has returned an annualized 12.7 percent in the fifteen years since its inception [in July 1990], outperforming its benchmark by 1.7 percent [the benchmark is the "One-Year Constant Maturity Treasury plus 6%"]. In addition, the portfolio has outperformed the Wilshire 5000 return of 10.8 percent over the relevant time period. The monthly standard deviation of the portfolio was a remarkably low 5.1 percent annualized, relative to the 14.6 percent volatility exhibited by the Wilshire 5000. The correlation of monthly returns with the Wilshire 5000 has been exactly zero, highlighting the significant diversification effect of the asset class." For reference, the standard deviation for Vanguard's Total Bond Market Index Fund for the 10 years ending 12/31/06 is 3.54%.

So how can individual investors access this asset class via mutual funds? There are a very limited number of funds available. Here are the three that I am presently using; the statistics are from finance.yahoo.com:

PAEDX, Pennsylvania Avenue Event-Driven Fund.
http://pennavefunds.com/event-driven-fun...
3-Yr annualized return to 12/31/06: 16.6%
Expense Ratio: 1.50%
3-Yr standard deviation to 12/31/06: 7.7
R-squared for 3-years ending 12/31/06: 19
Morningstar Rating: *****
(Nearly all of my 10% absolute return allocation has been in PAEDX since several months after its inception on 11/21/03.)

ARBFX, The Arbitrage Fund.
3-Yr annualized return to 12/31/06: 2.0%
3-Yr standard deviation to 12/31/06: 5.0
R-squared for 3-years ending 12/31/06: 53
5-Yr annualized return to 12/31/06: 6.0%
Expense Ratio: 1.95%
Morningstar Rating: ***

MERFX, The Merger Fund.
3-Yr annualized return to 12/31/06: 4.7%
3-Yr standard deviation to 12/31/06: 3.4
R-squared for 3-years ending 12/31/06: 35
5-Yr annualized return to 12/31/06: 3.8%
Expense Ratio: 2.08% according to finance.yahoo.com, but a document from the fund company says 1.38%.
Morningstar Rating: **

I am only aware of two other arbitrage mutual funds: GABCX and EMAAX. But their 3-Yr annualized returns to 12/31/06 are about half of PAEDX's or less. Note that merger arbitrage necessarily involves high turnover and thus is not tax efficient; it's best to keep it in a tax-protected retirement or endowment account. The high turnover and attendant extra research time helps to explain the relatively high expense ratios of arbitrage funds. Best, Neil