In the midst of a free-falling market, there are actually some investors making money. No, not just short-sellers. Reporting today’s top results are risk arbitrage investors -- those who take positions in companies that are in play, taking advantage of the gyrations in the stock prices of buyer and seller as the deal nears fruition. Given that private equity firms are practically in lockdown, stifling the high-profile deals they so recently dominated, this is one of the last areas one might expect to hold promise.

Beating the market
According to fund managers like Peter Schoenfeld, head of the eponymous asset management firm, the market turmoil of the past few months has seen deal spreads widen considerably from levels seen in recent years. For those with cash, annualized returns of 30% or more have been there for the taking.

Reported returns by various classes of hedge funds show the sector performing relatively well so far this year. Merger arbitrage managers have been near the top of the pile (after dedicated short-sellers and global macro managers). According to Hedge Fund Research's Peter Laurelli, the merger arbitrage camp is about flat year-to-date, with a drop of only 0.58%, while equity hedge funds overall are off almost 23% and long-only funds are down nearly 39%. Needless to say, top managers in the arbitrage sector are well ahead of the averages.

Since credit markets are locked up tighter than Fort Knox, it's easy to forget that there are still acquisitions taking place. Actually, total global M&A volume so far this year has totaled $3.2 trillion, down only 20% from last year. Of course, many deals concluded in recent months were initiated prior to the meltdown on Wall Street, and quite a bit of the dollar volume relates to the shotgun takeovers of financials like Washington Mutual, Countrywide Financial, and Bear Stearns.

More representative of the times is that global private equity transactions are off 73% by volume so far this year. Also, October was the biggest month on record for withdrawn deals. Gone are the feast days for the LBO kings. Takeover giants like Carlyle and Blackstone (NYSE:BX) that attracted massive inflows of funds from endowments and pension funds in recent years are starved for credit and find few names meeting their hurdle rate. Blackstone reported horrific earnings last week -- an economic net loss of $509 million -- because of assets gone sour and writedowns on deals.

Private equity on hiatus
Since July of last year, when credit markets first seized up, the big private equity players have been largely on hold. Middle-market activity, the province of smaller buyout firms that normally employ lower amounts of leverage, held up relatively well.

All this has opened the door for strategic buyers -- companies making acquisitions to build market share or cut overlapping costs. The number of announced global transactions in this arena is actually up 4% this year. The strategic buyers had been all but priced out of the market by liquidity-fueled private equity rivals. Now they are back in the driver’s seat.

Numerous combinations fit this bill, such as the acquisition of Centennial Communications (NASDAQ:CYCL) by AT&T (NYSE:T) or the purchase of Foundry Networks (NASDAQ:FDRY) by Brocade Communications (NASDAQ:BRCD). Of course, there have been massive financial tie-ups, such as Bank of America (NYSE:BAC) buying Merrill Lynch and Wells Fargo (NYSE:WFC) purchasing Wachovia. Cross-border deals are also being struck, including the pending acquisition of Anheuser-Busch (NYSE:BUD) by Belgian InBev.

How can you take advantage?
Strategic deals are likely to provide good returns for risk arbitrage investors going forward, but what does all of this mean for individual investors? Middle market activity deals tend to be quite reliable, and the current low valuations in the stock market are tempting to those companies with strong balance sheets. Cash-rich firms who can take advantage of the current environment by gobbling up rivals at cheap prices are great stocks to look out for.

Fool contributor Liz Peek owns shares of Merrill Lynch, but no other companies mentioned. Bank of America is an Income Investor recommendation. The Fool is investors writing for investors.