The revival of strategic deal-making machinery on Wall Street had risk arbitrageurs sensing opportunity. The nearly three-week bidding war between Hewlett-Packard and Dell 3Par in 2010 certainly whetted appetites and sparked lots of activity by risk arb hedge funds, which were sensing a return to the good old days.

But things are not panning out the way many hoped, Bloomberg reports. Unfortunately, individual deals have made clear that there are some considerable limits on potential bidders. Bidding wars have been all too few, despite the resurgence of the deal economy, low rates and a better financing environment.

Lawson Software, for example, agreed to sell itself for about $1.9 billion, but that created lots of losses for the funds who bet on a higher price. About $175 million was wiped out, notes Bloomberg.

For risk arbitrage funds, the stakes are high. Risk arb funds are up 2.3 percent year to date, which is not terrible by any stretch. That's in fact a tad better than the average hedge fund. But there's a lot more risk in the strategy than people assumed there would be when the deal-making recovery was in the green-shoots phase.

The competition for NYSE Euronext certainly raised hopes. As of now, the NYSE Euronext stock price hovers above the value of the Deutsche Bourse deal offer. So it could go either way from there.

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