The merger arbitrage spread has declined by more than 400 bps since 2002. This decline, which is both economically and statistically significant, corresponds to the decline in aggregate returns of merger arbitrage hedge funds, as well as increased inflows into merger arbitrage hedge funds. Part of the decline in the arbitrage spread may be explained by increased trading in the targets’ stocks following the merger announcement, reduced transaction costs, and changes in risk related to merger arbitrage. These findings suggest that some of the decline is likely to be permanent; therefore, investors seeking to invest in merger arbitrage hedge funds should focus on returns since 2002.