MERGER FUND, 485BPOS, 2000-01-26

MERGER FUND
485BPOS, 2000-01-26

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<PAGE> 1

As filed with the
Securities and Exchange Commission on January 26, 2000

File No. 2-76969
File No. 811-3445

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]

Pre-Effective Amendment No. [ ]

Post-Effective Amendment No. 23 [X]

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]

Amendment No. 24 [X]

THE MERGER FUND
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(Exact name of Registrant as Specified in Charter)

100 Summit Lake Drive
Valhalla, New York 10595
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(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code: (914) 741-5600

<TABLE>

<S> <C> <C>
Frederick W. Green, President Copy to: William H. Bohnett
THE MERGER FUND Fulbright & Jaworski L.L.P.
100 Summit Lake Drive 666 Fifth Avenue
Valhalla, New York 10595 New York, NY 10103
</TABLE>

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(Name and Address of Agent for Service)

It is proposed that this filing will become effective (check appropriate box):

[X] Immediately upon filing pursuant [ ] On (date) pursuant to
to paragraph (b) paragraph (b)

[ ] 60 days after filing pursuant [ ] On (date) pursuant to
to paragraph (a)(1) paragraph (a)(1)

[ ] 75 days after filing pursuant to [ ] On (date) pursuant
paragraph (a) (2) to paragraph (a)(2)
of Rule 485

If appropriate, check the following box:

[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

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[THE MERGER FUND LOGO]

100 Summit Lake Drive
Valhalla, New York 10595
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PROSPECTUS
JANUARY 26, 2000

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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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<PAGE> 3

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
RISK/RETURN SUMMARY......................................... 1
Bar Chart and Performance Table............................. 2
Fees and Expenses of the Fund............................. 3
INVESTMENT OBJECTIVES AND POLICIES.......................... 3
Risk Factors.............................................. 4
Leverage Through Borrowing................................ 5
Short Sales and Put and Call Options...................... 5
Investment Restrictions................................... 6
INVESTMENT ADVISER.......................................... 6
DISTRIBUTION ARRANGEMENTS................................... 7
PLANS OFFERED BY THE FUND................................... 7
The Merger Fund IRA Plan.................................. 7
Fund Investors Keogh Plans................................ 7
HOW TO PURCHASE SHARES...................................... 8
Automatic Investment Plan................................. 8
NET ASSET VALUE............................................. 8
REDEMPTIONS................................................. 9
Systematic Withdrawal Plan................................ 10
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS..................... 10
FINANCIAL HIGHLIGHTS........................................ 11
</TABLE>

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<PAGE> 4

RISK/RETURN SUMMARY

Investment Goal: The Fund seeks to achieve capital growth by
engaging in merger arbitrage.

Principal Investment
Strategy: Under normal market conditions, the Fund invests
at least 65% of its assets in the equity
securities of companies which are involved in
publicly announced mergers, takeovers, tender
offers, leveraged buyouts, spin-offs, liquidations
and other corporate reorganizations. Merger
arbitrage is a highly specialized investment
approach generally designed to profit from the
successful completion of such transactions. As
compared with conventional investing, the Adviser
considers the Fund's merger arbitrage investment
results to be less volatile than overall stock
prices.

Principal Investment Risks: The principal risk associated with the Fund's
merger arbitrage investment strategy is that
certain of the proposed reorganizations in which
the Fund invests may be renegotiated or
terminated, in which case losses may be realized.
The Fund's investment strategy may result in
short-term capital appreciation. This can be
expected to increase the portfolio turnover rate
and cause increased brokerage commission costs.
More rapid portfolio turnover also exposes taxable
shareholders to a higher current realization of
capital gains and a potentially larger current tax
liability. The Fund is not a "diversified" fund
within the meaning of the Investment Company Act
of 1940. Accordingly, the Fund may invest its
assets in a relatively small number of issuers,
thus making an investment in the Fund potentially
more risky than an investment in a diversified
fund which is otherwise similar to the Fund. Loss
of money is a risk of investing in the Fund.

Who Should Invest in the
Fund: The Fund is not intended to provide a balanced
investment program. The Fund is intended to be an
investment vehicle only for that portion of an
investor's capital which can appropriately be
exposed to risk. Each investor should evaluate an
investment in the Fund in terms of the investor's
own investment goals.

Closure of the Fund: Effective August 9, 1999 the Fund was closed to
new investors. Shareholders in the Fund as of
August 6, 1999 may purchase additional shares,
subject only to the terms set forth herein.
Investment advisors and financial planners who
held Fund shares in omnibus accounts as of August
6, 1999 may continue to make purchases in such
accounts. The Fund reserves the right to resume
sales to new investors at any time but has no
present plans to do so.

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<PAGE> 5

BAR CHART AND PERFORMANCE TABLE

The bar chart and table shown below indicate the risks of investing in the
Fund. The bar chart shows changes in the performance of the Fund's shares from
year to year over a ten-year period. The table following the bar chart shows how
the Fund's average annual returns for the listed periods compare to those of the
S&P 500, a widely used composite index of 500 publicly traded stocks.

The Fund's past performance does not necessarily indicate how the Fund will
perform in the future.
[Annual Total Returns Line Graph]

During the ten-year period shown in the above chart, the highest quarterly
return was 9.38% (for the quarter ended December 31, 1990) and the lowest
quarterly return was (10.04)% (for the quarter ended September 30, 1990).

AVERAGE ANNUAL TOTAL RETURNS

FOR THE PERIODS ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
The Merger Fund......... 17.39% 11.63% 10.52%
S&P 500................. 21.04% 28.56% 18.21%
</TABLE>

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FEES AND EXPENSES OF THE FUND

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF THE FUND.

<TABLE>
<S> <C>
SHAREHOLDER FEES
(fees paid directly from your account)

Maximum Sales Charge (Load) Imposed on Purchases (as a
percentage of offering price).......................... None

Maximum Deferred Sales Charge (Load) (as a percentage
of offering price)..................................... None

Maximum Sale Charge (Load) Imposed on Reinvested
Dividends and Other Distributions...................... None

Redemption Fee (as a percentage of amount redeemed).... None(1)

Exchange Fee........................................... None

ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)

Management Fees........................................ 1.00%

Distribution and/or Service (12b-1) Fees............... 0.18%

Other Expenses......................................... 0.20%(2)

Total Annual Fund Operating Expenses................... 1.38%
</TABLE>

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(1) Shareholders will be assessed fees for outgoing wire transfers, returned
checks and stop payment orders at prevailing rates charged by Firstar Mutual
Fund Services, LLC, the Fund's transfer agent.

(2) Each IRA and Keogh account will be charged a $12.50 annual maintenance fee
as well as fees for certain transactions.

EXAMPLE

THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE
FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

The example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
$140 $437 $755 $1,657
</TABLE>

INVESTMENT OBJECTIVES AND POLICIES

The Fund seeks to achieve capital growth by engaging in merger arbitrage.
The Fund's investment adviser is Westchester Capital Management, Inc. (the
"Adviser").

Under normal market conditions, the Fund invests at least 65% of its total
assets in the equity securities of companies which are involved in publicly
announced mergers, takeovers and other corporate reorganizations ("merger
arbitrage investments"). Depending upon the level of merger activity and other
economic and market conditions, the Fund may temporarily invest a substantial
portion of its assets in cash or cash equivalents, including money market
instruments such as Treasury bills and other short-term obligations of the
United States

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Government, its agencies or instrumentalities; negotiable bank certificates of
deposit; prime commercial paper; and repurchase agreements with respect to the
above securities.

Merger arbitrage is a highly specialized investment approach generally
designed to profit from the successful completion of proposed mergers,
takeovers, tender offers, leveraged buyouts, spin-offs, liquidations and other
types of corporate reorganizations. Although a variety of strategies may be
employed depending upon the nature of the reorganizations selected for
investment, the most common merger arbitrage activity involves purchasing the
shares of an announced acquisition target at a discount to their expected value
upon completion of the acquisition.

As compared to conventional investing, the Adviser considers the Fund's
merger arbitrage investment results to be less volatile than overall stock
prices. Over the last three-year period, the Fund's "beta" (a statistical
measure of market-related risk, whereby a fund's sensitivity to movements in the
Standard & Poor's 500 Stock Index is expressed relative to the Index's beta of
1.0) has averaged less than 0.2. The Adviser believes that this number is
significantly lower than comparable figures for other equity mutual funds
seeking capital growth. While some periods will be more conducive to a merger
arbitrage strategy than others, a systematic, disciplined arbitrage program may
produce attractive rates of return, even in flat or down markets.

The Fund's investment objective of achieving capital growth by engaging in
merger arbitrage is a fundamental policy which may not be changed without
shareholder approval. Except as otherwise stated, the Fund's other investment
objectives and policies are not fundamental and may be changed without obtaining
approval by the Fund's shareholders.

In making investments for the Fund, the Adviser is guided by the following
general principles: (1) Securities are purchased only after a reorganization is
announced or when one or more publicly disclosed events point toward the
likelihood of some type of reorganization within a reasonable period of time;
(2) Before an initial position is established, a preliminary analysis is made of
the proposed transaction to determine the probability and timing of a successful
completion. A more detailed review then takes place before the position is
enlarged; (3) In deciding whether or to what extent to invest in any given
reorganization, the Adviser places particular emphasis on the credibility,
strategic motivation and financial resources of the participants, and the
liquidity of the securities involved in the transaction; (4) The risk-reward
characteristics of each arbitrage position are assessed on an ongoing basis, and
the Fund's holdings may be adjusted accordingly; (5) The Adviser attempts to
invest in as many attractive reorganizations as can be effectively monitored in
order to minimize the impact on the Fund of losses resulting from the
termination of any given proposed transaction; and (6) The Adviser may invest
the Fund's assets in both negotiated, or "friendly," reorganizations and
non-negotiated, or "hostile," takeover attempts, but in either case the
Adviser's primary consideration is the likelihood that the transaction will be
successfully completed.

RISK FACTORS

The Fund's investment program involves investment techniques and securities
holdings which entail risks, in some cases different from the risks ordinarily
associated with investments in equity securities. The principal risk associated
with the Fund's merger arbitrage investments is that certain of the proposed
reorganizations in which the Fund invests may be renegotiated or terminated, in
which case losses may be realized. Also, because the Fund's assets are invested
in a smaller number of issues, there is a somewhat greater risk associated with
investment in the Fund than in a diversified investment company, as defined in
the Investment Company Act of 1940.

The Fund invests a portion of its assets to seek short-term capital
appreciation, which increases the portfolio turnover rate and causes increased
brokerage commission costs. A high turnover rate exposes taxable shareholders to
a higher current realization of capital gains, and thus a higher current tax
liability, than may be associated
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<PAGE> 8

with investments in other investment companies which emphasize long-term
investment strategies and thus have a lower turnover rate. The Fund's portfolio
turnover rate for its fiscal year ended September 30, 1999 was 387%.

LEVERAGE THROUGH BORROWING

The Fund may borrow from banks to increase its portfolio holdings of
securities. Such borrowings may be on a secured or unsecured basis at fixed or
variable rates of interest. The Investment Company Act of 1940 requires the Fund
to maintain continuous asset coverage of not less than 300% with respect to all
borrowings. This allows the Fund to borrow for such purposes an amount (when
taken together with any borrowings for temporary or emergency purposes as
described below) equal to as much as 50% of the value of its net assets (not
including such borrowings). If such asset coverage should decline to less than
300% due to market fluctuations or other reasons, the Fund may be required to
dispose of some of its portfolio holdings within three days in order to reduce
the Fund's debt and restore the 300% asset coverage, even though it may be
disadvantageous from an investment standpoint to dispose of assets at that time.
Leveraging will exaggerate any increase or decrease in the net asset value of
the Fund's portfolio, and in that respect may be considered a speculative
practice. The interest which the Fund must pay on borrowed money, together with
any additional fees to maintain a line of credit or any minimum average balances
required to be maintained, are additional costs which will reduce or eliminate
any net investment income and may also offset any potential capital gains.
Unless the appreciation and income, if any, on assets acquired with borrowed
funds exceed the costs of borrowing, the use of leverage will diminish the
investment performance of the Fund compared with what it would have been without
leverage.

The Fund, like many other investment companies, may also borrow money for
temporary or emergency purposes, but such borrowings, together with all other
borrowings, may not exceed 33% of the value of the Fund's gross assets when the
loan is made.

SHORT SALES AND PUT AND CALL OPTIONS

The Fund may employ various hedging techniques, such as short selling and
the selective use of put and call options, in an effort to reduce the risks
associated with certain of its investments. For example, when the terms of a
proposed acquisition call for the exchange of common stock and/or other
securities, the common stock of the company to be acquired may be purchased and,
at approximately the same time, an equivalent amount of the acquiring company's
common stock and/or other securities may be sold short. Any such short sale will
be made with the intention of later closing out ("covering") the short position
with the securities of the acquiring company received upon consummation of the
acquisition. The purpose of the short sale is to protect against a decline in
the market value of the acquiring company's securities prior to the
acquisition's completion. However, should the acquisition be called off or
otherwise not completed, the Fund may realize losses on both its long position
in the target company's shares and its short position in the acquirer's
securities.

At all times when the Fund does not own, or have an unconditional right to
receive, securities which are sold short, the Fund will maintain collateral
consisting of cash, cash equivalents and liquid securities equal in value on a
daily marked-to-market basis to the securities sold short.

The purchase of put options may be similarly used for hedging purposes. A
put option is a short-term contract which gives the purchaser of the option, in
return for a premium paid, the right to sell the underlying security at a
specified price upon exercise of the option at any time prior to the expiration
of the option. The market price of a put option will normally vary inversely
with the market price of the underlying security. Consequently, by purchasing
put options on merger arbitrage stocks, it may be possible for the Fund to
partially offset any decline in the market value of certain of the equity
positions held by the Fund. Also, as part of a merger arbitrage strategy
involving a pending corporate reorganization, the Fund may also write (sell)
uncovered put options. As a matter of fundamental policy, which may not be
changed without shareholder approval, the value of

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<PAGE> 9

all put options purchased or sold by the Fund, as measured by the premiums paid
or received, may not exceed 25% of the Fund's net assets.

The sale of covered call options may also be used by the Fund to reduce the
risks associated with individual investments and to increase total investment
return. The sale of call options will not be used for speculative purposes, and,
accordingly, call options will be written solely as covered call options; that
is, options on securities which the Fund owns at the time the call is sold. As a
matter of fundamental policy, the value of securities underlying call options
written by the Fund may not exceed 50% of the Fund's net assets. In addition,
the Fund may purchase call options only for the purpose of closing out
previously written covered call options.

The Adviser believes that, when used for hedging purposes, short sales and
options transactions should be viewed less as speculative strategies than as
techniques to help protect the assets of the Fund against unfavorable market
conditions that might otherwise adversely affect certain of its investments.
Nonetheless, a substantial percentage of the investments made by the Fund will
not lend themselves to hedging strategies and, even when available, such
strategies may not be successful. Also, options transactions involve special
risks including (i) possible imperfect correlation between the price movements
of the option and the underlying security and (ii) lack of assurance of a liquid
secondary market at any particular time and possible price fluctuation limits,
either of which may make it difficult or impossible to close a position when so
desired.

INVESTMENT RESTRICTIONS

The investment restrictions set forth below have been adopted by the Fund
as fundamental policies which may be changed only by a vote of the Fund's
shareholders. The Fund may not invest more than 5% of its total assets in
enterprises with less than three years of continuous operation; may not invest
more than 10% of its assets in the securities of any one issuer; may not
purchase more than 10% of an issuer's voting securities; may not invest more
than 10% of its assets in restricted securities or securities without readily
available market quotations, including repurchase agreements having a maturity
of more than seven days; may not borrow money in an amount exceeding 33% of its
total assets; and may not invest more than 25% of its total assets in securities
of companies in the same industry. The Fund may not invest more than 5% of its
net assets in warrants or more than 2% of its net assets in warrants not listed
on specified national stock exchanges. The Fund may make short sales but only
under certain conditions to the extent of 50% of its net assets. The value of
securities of any one company in which the Fund is short may not exceed the
lesser of 10% of its net assets or 10% of any class of such company's
securities.

INVESTMENT ADVISER

Westchester Capital Management, Inc., 100 Summit Lake Drive, Valhalla, New
York 10595, a registered investment adviser since 1980, is the Fund's investment
adviser. Westchester Capital Management, Inc. and affiliates also manage merger
arbitrage programs for other institutional investors, including offshore funds
and private limited partnerships. Subject to the authority of the Fund's Board
of Trustees, the Adviser is responsible for the overall management of the Fund's
business affairs. The fee charged the Fund is higher than those typically paid
by other mutual funds. This higher fee is attributable in part to the higher
expense incurred by the Adviser and the specialized skills required to manage a
portfolio of merger arbitrage investments. The Fund paid the Adviser an advisory
fee of 1.0% of the Fund's average daily net assets for the most recent fiscal
year.

Mr. Frederick W. Green has served as President of the Adviser since 1980
and also serves as the President and a Trustee of the Fund. Ms. Bonnie L. Smith
has served as Vice President of the Adviser since 1986 and also serves as Vice
President, Treasurer and Secretary of the Fund. Mr. Green and Ms. Smith have
been primarily responsible for the day-to-day management of the Fund's portfolio
since January 1989.

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<PAGE> 10

DISTRIBUTION ARRANGEMENTS

The Fund has adopted a plan of distribution (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. Under the Plan, the Fund may pay
to any broker-dealer with whom the Fund has entered into a contract to
distribute the Fund's shares, or any other qualified financial services firm,
compensation for distribution and/or shareholder-related services with respect
to shares held or purchased by their respective customers or in connection with
the purchase of shares attributable to their efforts. The amount of such
compensation paid in any one year shall not exceed 0.25% annually of the average
daily net assets of the Fund, which may be payable as a service fee for
providing record keeping, subaccounting, subtransfer agency and/or shareholder
liaison services. In addition, the Adviser may pay amounts from its own
resources for the provision of such services and the Fund may pay for its
expenses of distribution of its shares to prospective shareholders.

PLANS OFFERED BY THE FUND

Additional information about any of the plans described below may be
obtained by contacting the Adviser at 100 Summit Lake Drive, Valhalla, New York
10595 (telephone (914) 741-5600).

THE MERGER FUND IRA PLAN

The Fund makes available The Merger Fund IRA Plan for individuals to
establish an Individual Retirement Account ("IRA") under which shares of the
Fund may be purchased. The Merger Fund IRA Plan can be used to make regular IRA
contributions, and can also be used for a rollover or transfer from an existing
IRA, or for a rollover from a qualified retirement plan from which the
individual receives a lump-sum distribution.

An annual maintenance fee of $12.50 will be charged for each IRA account.
In addition, a $15.00 fee will be assessed to any IRA account which is
transferred to a successor trustee, distributed to a participant or for which a
refund of excess contribution is paid. These fees are subject to change upon
notification by Firstar Mutual Fund Services, LLC to the Fund.

The Fund also makes available to qualifying shareholders a "Roth IRA,"
which is a form of IRA created in 1997. Shareholders should consult with their
own financial advisers to determine eligibility.

FUND INVESTORS KEOGH PLANS

The Fund makes available the Fund Investors Defined Contribution Prototype
Plan and the Fund Investors Defined Benefit Prototype Plan (referred to
collectively in this prospectus as the "Fund Investors Keogh Plans"), for
corporations, self-employed individuals or partnerships, to establish a
qualified retirement plan under which shares of the Fund may be purchased. The
Fund Investors Keogh Plans can accept a transfer or qualified rollover from an
existing qualified retirement plan from which an individual receives a lump-sum
distribution, as well as regular annual contributions.

An annual maintenance fee of $12.50 will be charged for each Keogh account.
In addition, a $15.00 fee will be assessed to any Keogh account which is
transferred to a successor trustee or distributed to a participant, or for which
a refund of excess contribution is paid. These fees are subject to change upon
notification by Firstar Mutual Fund Services, LLC to the Fund.

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HOW TO PURCHASE SHARES

Shares of the Fund may be purchased at net asset value without any sales or
other charge by sending a completed application form to:

The Merger Fund
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, Wisconsin 53201-0701

However, applicants should not send any correspondence by overnight courier
to this post office box address. Correspondence sent by overnight courier should
be addressed to the Fund at:

Firstar Mutual Fund Services, LLC
Mutual Fund Services, Third Floor
615 East Michigan Street
Milwaukee, Wisconsin 53202

The minimum initial investment for individuals, IRAs, corporations,
partnerships or trusts is $2,000. There is no minimum for subsequent
investments. There is no minimum investment requirement for Fund Investors Keogh
Plans. Shares of the Fund are offered on a continuous basis. The Fund, however,
reserves the right, in its sole discretion, to reject any application to
purchase shares. Applications will not be accepted unless they are accompanied
by a check drawn on a U.S. bank, savings and loan, or credit union in U.S. funds
for the full amount of the shares to be purchased.

After an account is opened, additional shares may be purchased by sending a
check payable to "The Merger Fund," together with a note stating the name(s) on
the account and the account number, to Firstar Mutual Fund Services, LLC, P.O.
Box 701, Milwaukee, Wisconsin 53201-0701. All shares will be purchased at the
net asset value per share next determined after receipt of the shareholder's
application in proper order and acceptance of such application by the Fund. No
share certificates will be issued unless requested in writing. Shares of the
Fund may also be purchased through authorized broker-dealers who may charge for
their services.

The custodian, Firstar Bank Milwaukee, N.A., will charge a $25.00 fee
against a shareholder's account, in addition to any loss sustained by the Fund,
for any payment check returned to the custodian for insufficient funds.

Shareholders should contact the Administrator at (800) 343-8959 to obtain
the latest wire instructions for wiring funds to Firstar Mutual Fund Services,
LLC for the purchase of Fund shares and to notify Firstar Mutual Fund Services,
LLC that a wire transfer is coming.

AUTOMATIC INVESTMENT PLAN

A shareholder may also participate in the Fund's Automatic Investment Plan,
an investment plan that automatically debits money from the shareholder's bank
account and invests it in the Fund through the use of electronic funds transfers
or automatic bank drafts. After making an initial investment of at least $2,000,
shareholders may elect to make subsequent investments by transfers of a minimum
of $100 on specified days of each month into their established Fund account.
Shareholders should contact the Administrator at (800) 343-8959 for more
information about the Fund's Automatic Investment Plan.

NET ASSET VALUE

The net asset value per share of the Fund will be determined on each day
when the New York Stock Exchange is open for business at the close of the
Exchange and will be computed by determining the aggregate

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market value of all assets of the Fund less its liabilities, and then dividing
by the total number of shares outstanding. The determination of net asset value
for a particular day is applicable to all applications for the purchase of
shares as well as all requests for the redemption of shares received at or
before the close of trading on the Exchange on that day.

REDEMPTIONS

Fund shareholders will be entitled to redeem all or any portion of the
shares credited to their accounts by submitting a written request for redemption
to:

The Merger Fund
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, Wisconsin 53201-0701

Upon the receipt of such a request in "proper order," as described below,
the shareholder will receive a check based on the net asset value next
determined after the redemption request has been received, which may be more or
less than the amount originally invested. If the shares to be redeemed represent
an investment made by check, the Fund reserves the right to withhold the
proceeds until the check clears. It will normally take seven days to clear
checks.

A redemption request will be considered to have been received in "proper
order" if the following conditions are satisfied:

(i) the request is in writing, indicates the number of shares to be
redeemed and identifies the shareholder's account number;

(ii) the request is signed by the shareholder(s) exactly as the shares are
registered;

(iii) the request is accompanied by certificates, if any, issued
representing the shares, which have been endorsed for transfer (or
are themselves accompanied by an endorsed stock power) exactly as the
shares are registered; and

(iv) if the redemption proceeds are requested to be sent other than to the
address of record or if the proceeds of a requested redemption exceed
$25,000, the signature(s) on the request is/are guaranteed by an
eligible signature guarantor.

Questions concerning a redemption request may be addressed to the Fund at
its principal office. No redemption request will become effective until all
documents have been received in "proper order" by Firstar Mutual Fund Services,
LLC. The Fund does not accept telephone redemptions.

Shareholders who have an IRA or other retirement plan must indicate on
their redemption request whether or not to withhold federal income tax.
Redemption requests failing to indicate an election not to have federal tax
withheld will be subject to withholding.

Shareholders may also redeem Fund shares through broker-dealers holding
such shares who have made arrangements with the Fund permitting redemptions by
telephone or facsimile transmission. These broker-dealers may charge a fee for
this service.

If a shareholder's transactions at any time reduce the shareholder's
account in the Fund to below $1,000 in value, the Fund may notify the
shareholder that, unless the account is brought up to at least such minimum
amount, the Fund may, within 30 days, redeem all shares in the account and close
it by making payment to the shareholder.

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<PAGE> 13

Shareholders who effect redemptions by wire transfer will pay a $12.00 wire
transfer fee to the Transfer Agent to cover costs associated with the transfer.
In addition, a shareholder's bank may impose a charge for receiving wires.

SYSTEMATIC WITHDRAWAL PLAN

Individuals in whose accounts shares of the Fund are held or accounts in
which shares are allocated to The Merger Fund IRA Plan, the Fund Investors Keogh
Plans or other qualified retirement plan, which accounts in each case have a
current account value of at least $10,000, may adopt a Systematic Withdrawal
Plan to provide for periodic distributions for an annual fee of $15.00 per plan,
which fee is subject to change upon notification by Firstar Mutual Fund
Services, LLC to the Fund. By using the Systematic Withdrawal Plan, a
shareholder can request monthly, quarterly or other periodic checks for any
designated amount of $500 or more. A Systematic Withdrawal Plan may be opened by
making an application to Firstar Mutual Fund Services, LLC.

TAX STATUS, DIVIDENDS AND DISTRIBUTIONS

The Fund intends to distribute substantially all of its net investment
income and net capital gain in December. Both distributions will be in shares of
the Fund unless a shareholder elects to receive cash. Dividends from net
investment income (including any excess of net short-term capital gain over net
long-term capital loss) are taxable to investors as ordinary income, while
distributions of net capital gain (the excess of net long-term capital gain over
net short-term capital loss) are taxable as long-term capital gain regardless of
the shareholder's holding period for the shares. The Fund expects that, as a
result of its investment objectives and strategies, its distributions will
consist primarily of short-term capital gains, which are taxable as ordinary
income. Certain dividends or distributions declared in October, November or
December will be taxed to shareholders as if received in December if they are
paid during the following January.

Each year the Fund informs its shareholders of the amount and type of its
distributions. The Fund is required by federal tax law to withhold 31% of
dividends (including capital gain dividends) and redemption proceeds for
accounts (other than those of corporations and certain other exempt entities)
without a certified taxpayer identification number ("TIN") and certain other
certified information or with respect to which the IRS or a broker has notified
the Fund that withholding is required due to an incorrect TIN or a failure to
report taxable interest or dividends. The shareholder also must certify that the
number is correct and that he/she is not subject to backup withholding. The
certification is included as part of the share purchase application form. If the
shareholder does not have a social security number, he/she should indicate on
the purchase form that an application to obtain a number is pending. The Fund is
required to withhold taxes if a number is not delivered to the Fund within seven
days.

IRA's, Keogh plans and other qualified retirement plans are exempt from
federal income taxation under the Code.

This summary is not intended to be, nor should it be, construed as legal or
tax advice to any current holder of the Fund's shares. The Fund's shareholders
are urged to consult their own tax advisors to determine the tax consequences to
them of their ownership of the Fund's shares.

10
<PAGE> 14

FINANCIAL HIGHLIGHTS

The financial highlights table is intended to help you understand the
Fund's financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned on an investment in the
Fund (assuming reinvestment of all dividends and distributions). Information for
1995 through 1999 has been audited by PricewaterhouseCoopers LLP, whose report,
along with the Fund's financial statements, is included in the Fund's Annual
Report, which is available upon request. Effective December 1, 1996, the Fund
changed its fiscal year to end on September 30 in each year, commencing with the
fiscal year which ran from December 1, 1996 through September 30, 1997.

<TABLE>
<CAPTION>
THE MERGER FUND CONDENSED FINANCIAL INFORMATION
(FOR THE FISCAL YEARS 1995 - 1999 ) (AUDITED)
YEAR ENDED TEN MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED NOVEMBER 30,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ---------------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period......... $ 13.90 $ 15.35 $ 15.41 $ 14.87 $ 13.72
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income.................... 0.08(2)(3) 0.20(2)(3) 0.02(2)(3) 0.20(2)(3) 0.08(2)(3)
Net realized and unrealized gain (loss)
on investments....................... 2.71 (0.05) 1.35 1.24 1.78
-------- -------- -------- -------- --------
Total from investment operations......... 2.79 0.15 1.37 1.44 1.86
Less Distributions:
Dividends from net investment income..... (0.22) (0.03) (0.19) (0.08) --
Distributions from net capital gains..... (1.10) (1.57) (1.24) (0.82) (0.71)
-------- -------- -------- -------- --------
Total distributions...................... (1.32) (1.60) (1.43) (0.90) (0.71)
Net Asset Value, end of period............... $ 15.37 $ 13.90 $ 15.35 $ 15.41 $ 14.87
-------- -------- -------- -------- --------
Total Return................................. 21.39% 0.82% 9.68%(5) 10.26% 14.26%
Supplemental Data and Ratios:
Net assets, end of year (000's).......... $575,449 $426,392 $445,987 $489,084 $243,082
Ratio of operating expenses to average
net assets........................... 1.38%(1) 1.33%(1) 1.36%(1)(6) 1.36%(1) 1.41%(1)
Ratio of interest expense and dividends
on short positions to average net
assets............................... 1.07% 1.93% 2.93%(6) 0.95% 2.42%
Ratio of net investment income to average
net assets........................... 0.54% 1.36% 0.13%(6) 1.36% 0.57%
Portfolio turnover rate(4)............... 386.52% 355.38% 271.24% 276.99% 290.48%
</TABLE>

- ---------------------

(1) For the fiscal years ended September 30, 1999 and 1998, the ten months ended
September 30, 1997 and for the years ended November 30, 1996 and 1995, the
operating expense ratio excludes interest expense and dividends on short
positions. The ratios including interest expense and dividends on short
positions for the years ended September 30, 1999, 1998 and 1997 and for the
years ended November 30, 1996 and 1995, were 2.45%, 3.26%, 4.29%, 2.31% and
3.83%, respectively.

(2) Net investment income before interest expense and dividends on short
positions for the fiscal years ended September 30, 1999 and 1998, the ten
months ended September 30, 1997 and for the years ended November 30, 1996
and 1995 was $0.23, $0.49, $0.38, $0.35 and $0.42, respectively.

(3) Net investment income per share represents net investment income for the
respective period divided by the monthly average shares of beneficial
interest outstanding throughout each period.

(4) The numerator for the portfolio turnover rate includes the lesser of
purchases or sales (excluding short positions). The denominator includes the
average long position throughout the period.

(5) Not annualized.
(6) Annualized.

Further information regarding the Fund's performance is contained in the
Fund's Annual Report, a copy of which may be obtained without charge.

11
<PAGE> 15

For investors who want more information about the Fund, the following
documents are available upon request:

ANNUAL/SEMI-ANNUAL REPORTS: Additional information about the Fund's
investments is available in the Fund's annual and semi-annual reports to
shareholders. In the annual report, you will find a discussion of the market
conditions and investment strategies that significantly affected the Fund's
performance during its last fiscal year.

STATEMENT OF ADDITIONAL INFORMATION: The Fund's SAI provides more detailed
information about the Fund and is incorporated into this Prospectus by
reference.

The Fund's Annual Report, Semi-Annual Report and SAI are available, without
charge, upon request by contacting the Fund's Transfer Agent, Firstar Mutual
Fund Services, LLC, at 800-343-8959. Shareholder inquiries should be directed to
Firstar Mutual Fund Services, LLC, Mutual Fund Services, P.O. Box 701,
Milwaukee, WI 53201-0701. Correspondence sent by overnight courier should be
sent to Firstar Mutual Fund Services, LLC, Third Floor, 615 East Michigan
Street, Milwaukee, WI 53202.

You also can review the Fund's reports and SAI at the Securities and
Exchange Commission's Public Reference Room. Text-only copies can be obtained
from the SEC for a fee by writing to or calling the Public Reference Room of the
SEC, Washington, D.C. 20549-6009. 800-SEC-0330. Copies also can be obtained free
from the SEC's website at www.sec.gov.
Investment Company Act
File No. 811-3445

[THE MERGER FUND LOGO]
<PAGE> 16

THE MERGER FUND(R)
100 Summit Lake Drive
Valhalla, New York 10595

A no-load, open-end, nondiversified investment company which
seeks capital growth by engaging in merger arbitrage.

STATEMENT OF ADDITIONAL INFORMATION

January 26, 2000

This Statement of Additional Information is not a prospectus
and should be read in conjunction with the prospectus of The Merger Fund dated
January 26, 2000, a copy of which may be obtained without charge by contacting
the Fund's Transfer Agent, Firstar Mutual Fund Services, LLC, P.O. Box 701,
Milwaukee, Wisconsin 53201-0701 or (800) 343-8959.

The Fund's financial statements are incorporated by reference
in this Statement of Additional Information from the Fund's Annual Report.
<PAGE> 17
TABLE OF CONTENTS

<TABLE>
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES....................................... 1
Merger Arbitrage........................................................ 1
Special Risks of Over-the-Counter Options Transactions.................. 2
Investment Restrictions................................................. 2

INVESTMENT ADVISER....................................................... 5
Investment Adviser and Advisory Contract................................ 5
Other Service Providers................................................. 6

MANAGEMENT............................................................... 8
Trustees and Officers................................................... 8
Remuneration............................................................ 9
Code of Ethics.......................................................... 9

SERVICES AND PLANS OFFERED BY THE FUND................................... 10
The Merger Fund IRA Plan................................................ 10
Fund Investors Keogh Plans.............................................. 10
Systematic Withdrawal Plan.............................................. 11

NET ASSET VALUE.......................................................... 11

ADDITIONAL INFORMATION ABOUT REDEMPTIONS................................. 12

PERFORMANCE INFORMATION.................................................. 13
Total Return............................................................ 13
Other Information....................................................... 13
Comparison of Fund Performance.......................................... 14

TAX STATUS............................................................... 15

ORGANIZATION AND CAPITALIZATION.......................................... 20
General ................................................................ 20
Shareholder and Trustee Liability....................................... 22

ALLOCATION OF PORTFOLIO BROKERAGE........................................ 22

PORTFOLIO TURNOVER....................................................... 23

INDEPENDENT ACCOUNTANTS.................................................. 24
</TABLE>

i
<PAGE> 18
<TABLE>
<S> <C>
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT,
ACCOUNTING SERVICES AGENT AND ADMINISTRATOR............................. 24

COUNSEL.................................................................. 25

EXPERTS.................................................................. 25

FINANCIAL STATEMENTS..................................................... 25

APPENDIX................................................................. A-1
Covered Option Writing.................................................. A-1
Money Market Instruments................................................ A-1
Repurchase Agreements................................................... A-1
Short Selling........................................................... A-2
</TABLE>

ii
<PAGE> 19
INVESTMENT OBJECTIVES AND POLICIES

(See "INVESTMENT OBJECTIVES AND
POLICIES" in the Fund's prospectus.)

The Merger Fund (the "Fund") is a no-load, open-end,
nondiversified, registered management investment company which seeks to achieve
capital growth by engaging in merger arbitrage. The Fund's adviser is
Westchester Capital Management, Inc., 100 Summit Lake Drive, Valhalla, New York
10595 (the "Adviser").

Trading to seek short-term capital appreciation can be
expected to cause the Fund's portfolio turnover rate to be substantially higher
than that of the average equity-oriented investment company and, as a result,
may involve increased brokerage commission costs which will be borne directly by
the Fund and ultimately by its investors. See "Allocation of Portfolio
Brokerage" and "Portfolio Turnover." Certain investments of the Fund may, under
certain circumstances, be subject to rapid and sizable losses, and there are
additional risks associated with the Fund's overall investment strategy, which
may be considered speculative.

Merger Arbitrage.

Although a variety of strategies may be employed depending
upon the nature of the reorganizations selected for investment, the most common
merger arbitrage activity involves purchasing the shares of an announced
acquisition target at a discount from the expected value of such shares upon
completion of the acquisition. The size of the discount, or spread, and whether
the potential reward justifies the potential risk, are functions of numerous
factors affecting the riskiness and timing of the acquisition. Such factors
include the status of the negotiations between the two companies (for example,
spreads typically narrow as the parties advance from an agreement in principle
to a definitive agreement), the complexity of the transaction, the number of
regulatory approvals required, the likelihood of government intervention on
antitrust or other grounds, the type of consideration to be received and the
possibility of competing offers for the target company.

Because the expected gain on an individual arbitrage
investment is normally considerably smaller than the possible loss should the
transaction be unexpectedly terminated, Fund assets will not be committed unless
the proposed acquisition or other reorganization plan appears to the Adviser to
have a substantial probability of success. The expected timing of each
transaction is also extremely important since the length of time that the Fund's
capital must be committed to any given reorganization will affect the rate of
return realized by the Fund, and delays can substantially reduce such returns.
See "Portfolio Turnover."
<PAGE> 20
Special Risks of Over-the-Counter Options Transactions.

As part of its merger arbitrage strategy, the Fund may engage
in transactions in options and futures contracts which are traded
over-the-counter ("OTC transactions"). OTC transactions differ from
exchange-traded transactions in several respects. OTC transactions are
transacted directly with dealers and not with a clearing corporation. Without
the availability of a clearing corporation, OTC transaction pricing is normally
done by reference to information from market makers, which information is
carefully monitored by the Adviser and verified in appropriate cases.

As the OTC transactions are transacted directly with dealers,
there is a risk of nonperformance by the dealer as a result of the insolvency of
such dealer or otherwise, in which event the Fund may experience a loss. An OTC
transaction may only be terminated voluntarily by entering into a closing
transaction with the dealer with whom the Fund originally dealt. Any such
cancellation, if agreed to, may require the Fund to pay a premium to that
dealer. In those cases in which the Fund has entered into a covered transaction
and cannot voluntarily terminate the transaction, the Fund will not be able to
sell the underlying security until the investment instrument expires or is
exercised or different cover is substituted. In such cases, the Fund may not be
able to sell an underlying security even though it might otherwise be
advantageous to do so.

It is the Fund's intention to enter into OTC transactions only
with dealers which agree to, and which are expected to be capable of, entering
into closing transactions with the Fund, although there is no assurance that a
dealer will voluntarily agree to terminate the transaction. There is also no
assurance that the Fund will be able to liquidate an OTC transaction at any time
prior to expiration. OTC transactions for which there is no adequate secondary
market will be considered illiquid.

Investment Restrictions.

The following investment restrictions have been adopted by the
Fund as fundamental policies and may be changed only by the affirmative vote of
a majority of the outstanding shares of the Fund. As used in this Statement of
Additional Information and in the Fund's prospectus, the term "majority of the
outstanding shares of the Fund" means the vote of (i) 67% or more of the Fund's
shares present at a meeting, if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy, or (ii) more than 50% of
the Fund's outstanding shares, whichever is less.

These investment restrictions provide that:

(1) The Fund may not issue senior securities other than to
evidence borrowings as permitted in paragraph (5) below.

2
<PAGE> 21
(2) The Fund may not make short sales of securities (unless by
virtue of its ownership of other securities at the time of such sale, it owns or
has a prospective right to receive, without the payment of additional
compensation, securities equivalent in kind and amount to the securities sold).
The total market value of all securities sold short may not exceed 50% of the
value of the net assets of the Fund, and the value of securities of any one
issuer in which the Fund is short may not exceed the lesser of 10% of the value
of the Fund's net assets or 10% of the securities of any class of any issuer.

(3) The Fund may not purchase securities on margin, except
that the Fund may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities.

(4) The Fund may not (a) purchase call options except to
terminate, through a closing purchase transaction, its obligation with respect
to a previously written covered call option; (b) sell uncovered (naked) call
options; (c) sell covered call options the underlying securities of which have
an aggregate value (determined as of the date the calls are sold) exceeding 50%
of the value of the net assets of the Fund; or (d) invest in put options to the
extent that the premiums on protective put options exceed 25% of the value of
its net assets; provided that the provisions of this paragraph (4) shall not
prevent the purchase, ownership, holding or sale of forward contracts with
respect to foreign securities or currencies.

(5) The Fund may not borrow money except that it may borrow
(i) from banks to purchase or carry securities or other investments, (ii) from
banks for temporary or emergency purposes, or (iii) by entering into reverse
repurchase agreements, if, immediately after any such borrowing, the value of
the Fund's assets, including all borrowings then outstanding less its
liabilities, is equal to at least 300% of the aggregate amount of borrowings
then outstanding (for the purpose of determining the 300% asset coverage, the
Fund's liabilities will not include amounts borrowed). Any such borrowings may
be secured or unsecured. The Fund may issue securities (including senior
securities) appropriate to evidence the indebtedness, including reverse
repurchase agreements, which the Fund is permitted to incur.

(6) The Fund may not pledge, mortgage or hypothecate its
assets, except that to secure borrowings as permitted in paragraph (5) above,
the Fund may pledge securities having a market value at the time of pledge not
exceeding 33% of the value of its total assets. The Fund may, in addition,
pledge securities having a market value at the time of pledge not exceeding 50%
of the value of its net assets to secure short sales as permitted in paragraph
(2) above or covered option writing as permitted in paragraph (4) above.

(7) The Fund may not underwrite or participate in the
marketing of securities issued by other persons except to the extent that the
Fund may be deemed to be an underwriter under federal securities laws in
connection with the disposition of portfolio securities.

3
<PAGE> 22
(8) The Fund may not knowingly purchase or otherwise acquire
securities which are subject to legal or contractual restrictions on resale or
invest more than 10% of its total assets in securities without readily available
market quotations, including repurchase agreements having a maturity of more
than seven days.

(9) The Fund may not concentrate its investments in any
industry. No more than 25% of the value of the total assets of the Fund may be
invested in the securities of issuers having their principal business activities
in the same industry.

(10) The Fund may not purchase or sell real estate or real
estate mortgage loans as such, but this restriction shall not prevent the Fund
from investing in readily marketable interests in real estate investment trusts,
readily marketable securities of companies which invest in real estate, or
obligations secured by real estate or interests therein.

(11) The Fund may not purchase or sell commodities or
commodity contracts.

(12) The Fund may not make loans, except that subject to
paragraph (8), the Fund may enter into repurchase agreements maturing in seven
days or less.

(13) The Fund may not purchase warrants, valued at the lower
of cost or market, in excess of 5% of the net assets of the Fund (taken at
current value); provided that this shall not prevent the purchase, ownership,
holding or sale of warrants of which the grantor is the issuer of the underlying
securities. Included within that amount, but not to exceed 2% of the value of
the Fund's net assets, may be warrants which are not listed on the New York or
American Stock Exchange. Warrants acquired by the Fund at any time in units or
attached to securities are not subject to this restriction.

(14) The Fund may not invest in interests (other than equity
stock interests or debentures) in oil, gas or other mineral exploration or
development programs.

(15) The Fund may not invest in companies for the purpose of
exercising control or management.

(16) The Fund may not purchase or retain the securities of any
issuer, other than its own securities, if, to the knowledge of the Fund's
management, the Trustees and officers, or the directors and employees of the
Fund's investment adviser, who individually own beneficially more than 1/2% of
the outstanding securities of such issuer, together own beneficially more than
5% of such outstanding securities.

(17) The Fund may not invest more than 5% of the value of its
total assets in the securities of issuers which, together with any predecessors,
have been in continuous operation for less than three years.

4
<PAGE> 23
(18) The Fund may not participate on a joint or a joint and
several basis in any trading account in securities.

(19) The Fund may not purchase securities of other investment
companies, except by purchases in the open market where no underwriter or
dealer's commission or profit is involved, other than customary brokers'
commissions, and except as they may be acquired as part of a merger,
consolidation or acquisition of assets.

(20) The Fund may not invest more than 10% of its total assets
(taken at market value) in the securities of any one issuer, except those issued
or guaranteed by the United States Government, its agencies or
instrumentalities.

(21) The Fund may not purchase securities of any one issuer if
as a result more than 10% of the voting securities of such issuer would be held
by the Fund.

If a particular percentage restriction as set forth above is
adhered to at the time of investment, a later increase or decrease in percentage
resulting from a change in values or assets will not constitute a violation of
that restriction.

INVESTMENT ADVISER

(See "INVESTMENT ADVISER" and "PRINCIPAL
UNDERWRITER" in the Fund's prospectus.)

Investment Adviser and Advisory Contract.

The Fund's investment advisory contract with the Adviser (the
"Advisory Contract") provides that the Fund pay all of the Fund's expenses,
including, without limitation, (i) the costs incurred in connection with
registration and maintenance of its registration under the Securities Act of
1933, as amended, the Investment Company Act of 1940, as amended, and state
securities laws and regulations, (ii) preparation of and printing and mailing
reports, notices and prospectuses to current shareholders, (iii) transfer taxes
on the sales of the Fund's shares and on the sales of portfolio securities, (iv)
brokerage commissions, (v) custodial and shareholder transfer charges, (vi)
legal, auditing and accounting expenses, (vii) expenses of servicing shareholder
accounts, (viii) insurance expenses for fidelity and other coverage, (ix) fees
and expenses of Trustees who are not "interested persons" within the meaning of
the Investment Company Act of 1940, (x) expenses of Trustee and shareholder
meetings and (xi) any expenses of distributing the Fund's shares which may be
payable pursuant to a Plan of Distribution adopted pursuant to Rule 12b-1 under
the Investment Company Act of 1940. The Fund is also liable for such
nonrecurring expenses as may arise, including litigation to which the Fund may
be a party. The Fund has an obligation to indemnify each of its officers and
Trustees with respect to such litigation but not against any liability to which
he would

5
<PAGE> 24
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.

The Adviser receives an advisory fee, payable monthly, for the
performance of its services at an annual rate of 1.0% of the average daily net
assets of the Fund. The fee will be accrued daily for the purpose of determining
the offering and redemption price of the Fund's shares.

The Advisory Contract will continue in effect from year to
year provided such continuance is approved at least annually by (i) a vote of
the majority of the Fund's Trustees who are not parties thereto or "interested
persons" (as defined in the Investment Company Act of 1940) of the Fund or the
Adviser, cast in person at a meeting specifically called for the purpose of
voting on such approval and by (ii) the majority vote of either all of the
Fund's Trustees or the vote of a majority of the outstanding shares of the Fund.
The Advisory Contract may be terminated without penalty on 60 days' written
notice by a vote of a majority of the Fund's Trustees or by the Adviser, or by
holders of a majority of the Fund's outstanding shares. The Advisory Contract
shall terminate automatically in the event of its assignment.

For the fiscal years ended September 30, 1997, 1998 and 1999,
the Fund incurred advisory fees of $3,864,592, $4,722,291 and $4,549,174,
respectively, to the Adviser.

Other Service Providers.

The Fund's principal underwriter is Mercer Allied Company,
L.P. ("Mercer"), One Wall Street, Albany, New York 12205. Mercer is a Delaware
limited partnership organized in 1994, and is currently majority-owned by The
Ayco Company, L.P., a registered investment adviser principally engaged in
personal financial counseling. Mercer is a broker-dealer registered under the
Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc.

The Fund has adopted a plan of distribution dated July 14,
1998 (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940. Under the Plan, the Fund may pay to Mercer, to any broker-dealer with whom
Mercer or the Fund has entered into a contract to distribute Fund shares, or to
any other qualified financial services firm, compensation for distribution
and/or shareholder-related services with respect to shares held or purchased by
their respective customers or in connection with the purchase of shares
attributable to their efforts. The amount of such compensation paid in any one
year shall not exceed 0.25% annually of the average daily net assets of the
Fund.

The Plan provides that the Trustees will review, at least
quarterly, a report of distribution expenses incurred under the Plan and the
purposes for which such expenses were incurred. The Plan will remain in effect
from year to year provided such continuance is approved

6
<PAGE> 25
at least annually by the vote of a majority of the Fund's Trustees who are not
"interested persons" (as defined in the Investment Company Act of 1940) of the
Fund, the Adviser or Mercer and who have no direct or indirect interest in the
operation of the Plan or any related agreement (the "Rule 12b-1 Trustees"), cast
in person at a meeting called for the purpose of voting on such approval, and
additionally by a vote of either a majority of the Fund's Trustees or a majority
of the outstanding shares of the Fund.

The Plan may be terminated at any time by vote of a majority
of the Rule 12b-1 Trustees or by vote of a majority of the Fund's outstanding
shares. The Plan may not be amended to increase materially the amount of
distribution expenses payable under the Plan without approval of the Fund's
shareholders. In addition, all material amendments to the Plan must be approved
by the Trustees in the manner described above.

The Fund has entered into service agreements with, among
others, Charles Schwab & Company, Inc. ("Schwab") and National Financial
Services Corporation ("NFSC"). Though the terms of the Fund's agreements vary,
service providers generally are required to provide various shareholder services
to the Fund, including records maintenance, shareholder communications,
transactional services, tax information and reports, and facilitation of
purchase and redemption orders. Payments generally are made under the Plan at
the annual rate of 0.25% of the value of the Fund's shares held in accounts
maintained by each such service provider. In the case of the Fund's agreements
with Schwab and NFSC, the Adviser is required to pay an additional 0.10% of the
value of all Fund shares held in their respective accounts. The Fund is required
to make these payments to its service providers regardless of any actual
expenses incurred by them.

The Fund incurred total expenses of $842,509, $708,635 and
$618,416 during fiscal years 1999, 1998 and 1997, respectively, under its
agreements with its principal underwriter and other service providers. During
fiscal 1999, the Fund paid $59,027 to Mercer, $306,871 to Schwab and $134,677to
NFSC. During fiscal 1998, the Fund paid or accrued $83,625 to Mercer, $361,109
to Schwab and $125,684 to NFSC. During fiscal 1997, the Fund paid or accrued
$57,379 to Mercer, $329,465 to Schwab and $99,841 to NFSC.

During the last fiscal year, the Fund paid the following
amounts for the following services under the Plan:

<TABLE>
<S> <C>
Advertising......................................... $ -
Printing and mailing prospectuses to
other than current shareholders..................... 18,866
Compensation to broker-dealers...................... 722,537
Compensation to sales personnel..................... -
Interest, carrying or other -
financing charges...................................
</TABLE>

7
<PAGE> 26
<TABLE>
<CAPTION>
<S> <C>
Other............................................... -
</TABLE>

MANAGEMENT

Trustees and Officers.

The Fund's Trustees and officers are listed below. Except as
indicated, each Trustee has held the office shown or other offices in the same
company for the last five years.

The "interested" Trustees as defined in the Investment Company
Act of 1940 are indicated by an asterisk(*).

<TABLE>
<CAPTION>
Position(s) Held Principal Occupation(s)
Name and Address Age with the Fund During the Past 5 Years
- ---------------- --- ----------------- ------------------------
<S> <C> <C> <C>
Frederick W. Green* 53 President and Trustee President of Westchester Capital
Westchester Capital Management, Management, Inc., the Fund's
Inc. Adviser.
100 Summit Lake Drive
Valhalla, NY 10595

Bonnie L. Smith 51 Vice President, Vice President of Westchester
Westchester Capital Treasurer and Secretary Capital Management, Inc., the
Management, Inc. Fund's Adviser.
100 Summit Lake Drive
Valhalla, NY 10595

James P. Logan, III 63 Trustee President of Logan Chace LLC,
Logan Chace LLC an executive search firm.
420 Lexington Avenue
New York, NY 10170

Michael J. Downey 56 Trustee Consultant and independent
2 Parsons Lane financial adviser since July
Rochester, NY 14610 1993. President and Director of
Asia Pacific Fund, Inc.
</TABLE>

8
<PAGE> 27

<TABLE>
<CAPTION>
Position(s) Held Principal Occupation(s)
Name and Address Age with the Fund During the Past 5 Years
- ---------------- --- ----------------- ------------------------
<S> <C> <C> <C>
Joseph Neuberger 37 Assistant Secretary Vice President of Firstar Mutual
Firstar Mutual Fund Services, LLC Fund Services, LLC, and
615 East Michigan Street Manager of Fund Administration
Milwaukee, WI 53202 and Compliance since August
1994. Previously, manager with
Arthur Andersen LLP.

Michael Peck 32 Assistant Secretary Compliance Officer and other
Firstar Mutual Fund Services, LLC positions, Firstar Mutual Fund
615 East Michigan Street Services, LLC.
Milwaukee, WI 53202
</TABLE>

As of December 31, 1999, the Trustees and officers of the Fund
and the Adviser's retirement funds, as a group, owned less than 1% of the Fund's
outstanding shares.

Remuneration.

Management considers that Messrs. Logan and Downey are not
"interested persons" (as defined in the Investment Company Act of 1940) of the
Fund or the Adviser. The fees of the non-interested Trustees (which are $6,000
per year and $1,000 per meeting attended), in addition to their out-of-pocket
expenses in connection with attendance at Trustees meetings, are paid by the
Fund. For the fiscal year ended September 30, 1999, the Fund paid the following
in Trustees' fees:

COMPENSATION TABLE
(for the fiscal year ended September 30, 1999)

<TABLE>
<CAPTION>
Pension or Estimated
Aggregate Retirement Benefits Annual Total
Compensation Accrued as Part of Benefits upon Compensation
Name of Trustee from Registrant Fund Expenses Retirement from Registrant
- -------------------------- --------------- ------------------- ------------- ---------------
<S> <C> <C> <C> <C>
Frederick W. Green 0 0 0 0
- -------------------------- --------------- ------------------- ------------- ---------------
William H. Bohnett 0 0 0 0
(resigned October 12,
1999)
- -------------------------- --------------- ------------------- ------------- ---------------
Michael J. Downey $ 10,000 0 0 $ 10,000
- -------------------------- --------------- ------------------- ------------- ---------------
James P. Logan $ 10,000 0 0 $ 10,000
- -------------------------- --------------- ------------------- ------------- ---------------
</TABLE>

9
<PAGE> 28

Code of Ethics

The Fund's Trustees and officers and employees of the Adviser
are permitted to engage in personal securities transactions subject to the
restrictions and procedures contained in the Fund's and the Adviser's Code of
Ethics, which has been approved by the Board of Trustees in accordance with
standards set forth under the Investment Company Act. The Fund's and the
Adviser's Code of Ethics are filed as an exhibit to the Fund's Registration
Statement and are available to the public.

<PAGE> 29
SERVICES AND PLANS OFFERED BY THE FUND

(See "PLANS OFFERED BY THE FUND" in the Fund's prospectus.)

The costs of services rendered to the Fund's investors by its
transfer agent, Firstar Mutual Fund Services, LLC ("Firstar") are paid for by
the Fund; however, in order to cover abnormal administrative costs, investors
requesting an historical transcript of their account will be charged a fee based
upon the number of years researched. The Fund reserves the right, on 60 days'
written notice, to charge investors to cover other administrative costs of
services provided to shareholders.

The Merger Fund IRA Plan.

The Fund makes available an Individual Retirement Account
("IRA"), known as "The Merger Fund IRA Plan." The Merger Fund IRA Plan provides
individuals with the opportunity to establish an IRA in order to purchase shares
of the Fund. The Merger Fund IRA Plan can also be used for a transfer from an
existing IRA, or for a rollover from a qualified retirement plan from which the
individual receives a lump-sum distribution. The form of The Merger Fund IRA
Plan meets the requirements of Section 408 of the Internal Revenue Code. Firstar
Bank Milwaukee, N.A. acts as custodian for The Merger Fund IRA Plan, and the
adoption of The Merger Fund IRA Plan by each individual is subject to acceptance
or rejection by Firstar Bank Milwaukee, N.A. in its capacity as custodian.

The Fund also makes available to qualifying shareholders a
"Roth IRA," which is a form of IRA created in 1997. Shareholders should consult
with their own financial advisers to determine eligibility.

Fund Investors Keogh Plans.

The Fund makes available the Fund Investors Defined
Contribution Prototype Plan (the "Fund Investors Defined Contribution Keogh
Plan") and the Fund Investors Defined Benefit Prototype Plan (the "Fund
Investors Defined Benefit Keogh Plan"). The Fund Investors Defined Contribution
Keogh Plan and the Fund Investors Defined Benefit Keogh Plan (collectively
hereinafter referred to as the "Fund Investors Keogh Plans") provide
opportunities to corporations, self-employed individuals and partnerships to
establish qualified retirement plans under which shares of the Fund may be
purchased. The Fund Investors Keogh Plans can, in most cases, also accept a
transfer or a rollover from an existing qualified retirement plan from which an
individual receives a lump-sum distribution of the individual's entire account
balance in such plan. A defined benefit qualified retirement plan specifies what
a participant's pension benefit will be, and the employer (including a
self-employed individual) adopting the plan must then fund the plan on an
actuarial basis so it can pay the promised benefit. A defined contribution
qualified retirement plan does not promise any definite benefit but instead
provides for certain contributions to be made to the plan,

11
<PAGE> 30
and a participant's ultimate benefit depends on the amount that has accumulated
in his account. The Fund Investors Keogh Plans have received an opinion from the
Internal Revenue Service approving the plans as prototype plans which meet the
requirements of Sections 401 and 501 of the Internal Revenue Code of 1986, as
amended. The Fund Investors Keogh Plans are in the process of being submitted to
the Internal Revenue Service for additional approval of certain amendments
required by recent changes in tax law. Firstar acts as custodian of the Fund
Investors Keogh Plans. The Fund Investors Keogh Plans as adopted by each
employer (including a self-employed individual) or partnership are subject to
acceptance or rejection by Firstar in its capacity as trustee of the Fund
Investors Keogh Plans.

Systematic Withdrawal Plan.

Shareholders participating in the Fund's Systematic Withdrawal
Plan should note that disbursements may be based on the redemption of a fixed
dollar amount, fixed number of shares, percent of account or declining balance.
Any income, dividends and capital gain distributions on shares held in
Systematic Withdrawal Plan accounts will be reinvested in additional Fund
shares. Systematic Withdrawal Plan payments will be made out of the proceeds
realized from the redemption of Fund shares held in the account. These
redemptions made to effect withdrawal payments may reduce or exhaust entirely
the original investment held under the Plan. A Systematic Withdrawal Plan may be
terminated at any time by the shareholder or the Fund upon written notice and
will be automatically terminated when all Fund shares in the shareholder's
account under the Plan have been liquidated.

NET ASSET VALUE

(See "NET ASSET VALUE" in the Fund's prospectus.)

The net asset value per share of the Fund will be determined
on each day when the New York Stock Exchange is open for business and will be
computed by taking the aggregate market value of all assets of the Fund less its
liabilities, and dividing by the total number of shares outstanding. Each
determination will be made (i) by valuing portfolio securities, including open
short positions, which are traded on the New York Stock Exchange, American Stock
Exchange and on the Nasdaq National Market System at the last reported sales
price on that exchange; (ii) by valuing put and call options which are traded on
the Chicago Board Options Exchange or any other domestic exchange at the last
sale price on such exchange; (iii) by valuing listed securities and put and call
options for which no sale was reported on a particular day and securities traded
on the over-the-counter market at the mean between the last bid and asked
prices; and (iv) by valuing any securities or other assets for which market
quotations are not readily available at fair value in good faith and under the
supervision of the Trustees, although the actual calculation may be done by
others. The Adviser reserves the right to value securities, including options,
at prices other than last-sale prices when such last-sale prices are believed
unrepresentative of fair market value as determined in good faith by the
Adviser.

12
<PAGE> 31
The assets of the Fund received for the issue or sale of its
shares, and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, shall constitute the underlying assets of the Fund. In
the event of the dissolution or liquidation of the Fund, the holders of shares
of the Fund are entitled to share pro rata in the net assets of the Fund
available for distribution to shareholders.

ADDITIONAL INFORMATION ABOUT REDEMPTIONS

(See "REDEMPTIONS" in the Fund's prospectus.)

Supporting documents in addition to those listed under
"Redemptions" in the Fund's prospectus will be required from executors,
administrators, trustees, or if redemption is requested by one other than the
shareholder of record. Such documents include, but are not restricted to, stock
powers, trust instruments, certificates of death, appointments as executor,
certificates of corporate authority and waiver of tax required in some states
when settling estates.

Under the Investment Company Act of 1940, a shareholder's
right to redeem shares and to receive payment therefor may be suspended at
times: (a) when the New York Stock Exchange is closed, other than customary
weekend and holiday closings; (b) when trading on that exchange is restricted
for any reason; (c) when an emergency exists as a result of which disposal by
the Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, provided that applicable rules and regulations of the Securities and
Exchange Commission (or any succeeding governmental authority) will govern as to
whether the conditions prescribed in (b) or (c) exist; or (d) when the
Securities and Exchange Commission by order permits a suspension of the right to
redemption or a postponement of the date of payment on redemption. In case of
suspension of the right of redemption, payment of a redemption request will be
made based on the net asset value next determined after the termination of the
suspension.

13
<PAGE> 32
PERFORMANCE INFORMATION

Total Return.

Average annual total return quotations which may used in the
Fund's advertising and promotional materials are calculated according to the
following formula:

P(1+T)(n) = ERV

Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
period.

Under the foregoing formula, the time periods used in any
advertising will be based on rolling calendar quarters, updated to the last day
of the most recent quarter prior to submission of the advertising for
publication. Average annual total return, or "T" in the above formula, is
computed by finding the average annual compounded rates of return over the
period that would equate the initial amount invested to the ending redeemable
value. Average annual total return assumes the reinvestment of all dividends and
distributions.

The calculation assumes an initial $1,000 payment and assumes
all dividends and distributions by the Fund are reinvested at the price stated
in the Prospectus on the reinvestment dates during the period, and includes all
recurring fees that are charged to all shareholder accounts.

A Fund may also calculate total return on a cumulative basis
which reflects the cumulative percentage change in value over the measuring
period. The formula for calculating cumulative total return can be expressed as
follows:

Cumulative Total Return = [ (ERV) - 1 ]
-----
P

Other Information.

The Fund's performance data quoted in any advertising and
other promotional materials represents past performance and is not intended to
predict or indicate future results. The return and principal value of an
investment in the Fund will fluctuate, and an investor's redemption proceeds may
be more or less than the original investment amount.

14
<PAGE> 33
Comparison of Fund Performance.

The performance of the Fund may be compared to data prepared
by Lipper Analytical Services, Inc., Morningstar, Inc. or other independent
services which monitor the performance of investment companies, and may be
quoted in advertising in terms of its ranking in each applicable universe. In
addition, the Fund may use performance data reported in financial and industry
publications, including Barron's, Business Week, Forbes, Fortune, Investor's
Daily, IBC/Donoghue's Money Fund Report, Money Magazine, The Wall Street Journal
and USA Today.

The Fund may from time to time use the following unmanaged
index for performance comparison purposes:

S&P 500 Index -- the S&P 500 is an index of 500 stocks
designed to mirror the overall equity market's industry weighting. Most, but not
all, large capitalization stocks are in the Index. There are also some small
capitalization names in the Index. The Index is maintained by Standard & Poor's
Corporation. It is market capitalization weighted. There are always 500 issuers
in the S&P 500. Changes are made by Standard & Poor's as needed.

15
<PAGE> 34
TAX STATUS

(See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's
prospectus.)

The Fund has qualified and elected to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"), and intends to continue to so qualify, which requires compliance
with certain requirements concerning the sources of its income, diversification
of its assets, and the amount and timing of its distributions to shareholders.
Such qualification does not involve supervision of management or investment
practices or policies by any government agency or bureau. By so qualifying, the
Fund will not be subject to federal income or excise tax on its net investment
income or net capital gain which are distributed to shareholders in accordance
with the applicable timing requirements. Net investment income and net capital
gain of the Fund will be computed in accordance with Section 852 of the Code.

The Fund intends to distribute all of its net investment
income, any excess of net short-term capital gains over net long-term capital
losses, and any excess of net long-term capital gains over net short-term
capital losses in accordance with the timing requirements imposed by the Code
and therefore will not be required to pay any federal income or excise taxes.
Distributions of net investment income and net capital gain will be made after
September 30, the end of each fiscal year, and no later than December 31 of each
year. Both types of distributions will be in shares of the Fund unless a
shareholder elects to receive cash.

The Fund is subject to a 4% nondeductible excise tax on
certain undistributed amounts of ordinary income and capital gain under a
prescribed formula contained in Section 4982 of the Code. The formula requires
payment to shareholders during a calendar year of distributions representing at
least 98% of the Fund's ordinary income for the calendar year and at least 98%
of its capital gain net income (i.e., the excess of its capital gains over
capital losses) realized during the one-year period ending October 31 during
such year plus 100% of any income that was neither distributed nor taxed to the
Fund during the preceding calendar year. Under ordinary circumstances, the Fund
expects to time its distributions so as to avoid liability for this tax.

Net investment income is made up of dividends and interest
less expenses. Net capital gain for a fiscal year is computed by taking into
account any capital loss carryforward of the Fund.

The following discussion of tax consequences is for the
general information of shareholders who are subject to tax. Shareholders that
are IRAs, Keogh plans or other qualified retirement plans are exempt from income
taxation under the Code.

16
<PAGE> 35

Distributions of taxable net investment income and the excess
of net short-term capital gain over net long-term capital loss are taxable to
shareholders as ordinary income.

Dividends from domestic corporations may comprise some portion
of the Fund's gross income. To the extent that such dividends constitute a
portion of the Fund's gross income, a portion of the income distributions
received by corporations from the Fund may be eligible for the 70% deduction for
dividends received. Receipt of qualifying dividends may result in the reduction
of a corporate shareholder's tax basis in its shares by the untaxed portion of
such dividends if they are treated as "extraordinary dividends" under Section
1059 of the Code. The dividends-received deduction is reduced to the extent the
shares of the Fund with respect to which the dividends are received are treated
as debt-financed under federal income tax law and is eliminated if the shares
are deemed to have been held for less than 46 days (91 days for preferred stock)
during the 90-day (180 days for preferred stock) period beginning on the date
which is 45 days (90 days for preferred stock) before the ex-dividend date (for
this purpose, holding periods are reduced for periods where the risk of loss
with respect to shares is diminished). The same restrictions apply to the Fund
with respect to its ownership of the dividend-paying stock. In addition, the
deducted amount is included in the calculation of the federal alternative
minimum tax, if any, applicable to such corporate shareholders.

Distributions of net capital gain ("capital gain dividends")
are taxable to shareholders as long-term capital gain, regardless of the length
of time the shares of the Fund have been held by such shareholders. Capital gain
dividends are not eligible for the dividends-received deduction. A noncorporate
shareholder's net capital gains will be taxed at a maximum rate of 20% for
property held more than 12 months.

A redemption of Fund shares by a shareholder will result in
the recognition of taxable gain or loss depending upon the difference between
the amount realized and his tax basis in his Fund shares. Such gain or loss is
treated as a capital gain or loss if the shares are held as capital assets. In
the case of a noncorporate shareholder, if such shares were held for more than
12 months at the time of disposition such gain will be long-term capital gain
and will be taxed at a maximum effective rate of 20%; and if such shares were
held for one year or less at the time of disposition, such gain will be
short-term capital gain and will be taxed at a maximum effective rate of 39.6%.
Capital gains of corporate shareholders will be long-term or short-term
depending upon whether the shareholder's holding period exceeds one year, and
are not subject to varying effective tax rates. However, any loss realized upon
the redemption of shares within six months from the date of their purchase will
be treated as a long-term capital loss to the extent of any amounts treated as
capital gain dividends

17
<PAGE> 36
during such six-month period. All or a portion of any loss realized upon the
redemption of shares may be disallowed to the extent shares are purchased
(including shares acquired by means of reinvested dividends) within 30 days
before or after such redemption.

All distributions will be included in the individual
shareholder's alternative minimum taxable income and in the income which may be
subject to tax under the alternative minimum tax for corporations.

Distributions of taxable net investment income and net capital
gain will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.

All distributions of taxable net investment income and net
capital gain, whether received in shares or in cash, must be reported by each
taxable shareholder on his or her federal income tax return. Dividends or
distributions declared in October, November or December as of a record date in
such a month, if any, will be deemed to have been received by shareholders on
December 31, if paid during January of the following year. Redemptions of shares
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.

Assuming sufficient earned income, an individual may generally
contribute up to $2,000 per year to a regular IRA. A regular IRA contribution
may be deductible if (i) neither the individual nor his or her spouse is an
active participant in an employer's retirement plan ("Plan Participant"), or
(ii) the individual (and his or her spouse, if applicable) has an adjusted gross
income ("AGI") below a certain threshold level. The threshold levels are
scheduled to continue to gradually increase through the year 2007. There is a
separate threshold level and phase-out limit that apply to certain individuals
who are not Plan Participants but whose spouses are Plan Participants. These
"non-active Plan Participants" can make deductible IRA contributions for a
taxable year if their joint AGI does not exceed $150,000 (with a phase-out of
the deduction for AGI between $150,000 and $160,000).

There are a number of additional forms of IRA that may be
available, including a Roth IRA and an Educational IRA. Shareholders should
contact their tax advisers for more information regarding their eligibility to
make IRA contributions and the advisability of same.

Distributions by the Fund result in a reduction in the net
asset value of the Fund's shares. Should a distribution reduce the net asset
value below a shareholder's cost basis, such distribution would nevertheless be
taxable to the shareholder as ordinary income or capital gain as described
above, even though, from an investment standpoint, it may constitute a partial
return of capital. In particular, investors should consider the tax implications
of buying shares just prior to

18
<PAGE> 37
a distribution. The price of shares purchased at that time includes the amount
of the forthcoming distribution. Those purchasing just prior to a distribution
will then receive a partial return of capital upon the distribution, which will
nevertheless be taxable to them.

If the Fund makes a "constructive sale" of an "appreciated
financial position," the Fund will recognize gain as if the position were sold
at fair market value on the date of such constructive sale. Constructive sales
include short sales of substantially identical property, offsetting notional
principal contracts with respect to substantially identical property and futures
and forward contracts to deliver substantially identical property. However,
transactions that otherwise would be treated as constructive sales are
disregarded if closed within 30 days after the close of the taxable year and the
Fund holds the position and does not hedge such position for 60 days thereafter.
In addition, to the extent provided in regulations (which have not yet been
promulgated), a constructive sale also occurs if a taxpayer enters into one or
more other transactions (or acquires one or more positions) that have
"substantially the same effect" as the transactions described above. Appreciated
financial positions include positions with respect to stock, debt, instruments
or partnership interests if gain would be recognized on a disposition at fair
market value. If the constructive sale rules apply, adjustments are made to the
basis and holding period of the affected financial position.

Equity options (including call and put options on stock) and
over-the-counter options on debt securities written or purchased by the Fund
will be subject to tax under Section 1234 of the Code. The character of any gain
or loss recognized (i.e., long-term or short-term) generally will depend, in the
case of a lapse or sale of the option, on the Fund's holding period for the
option, and in the case of an exercise of the option, on the Fund's holding
period for the underlying security. The purchase of a put option may constitute
a short sale for federal income tax purposes, causing an adjustment in the
holding period of the underlying security or a substantially identical security
in the Fund's portfolio. If the Fund writes a put or call option, no gain is
recognized upon its receipt of a premium. If the option lapses or is closed out,
any gain or loss is treated as short-term capital gain or loss. If a call option
is exercised, the character of the gain or loss depends on the holding period of
the underlying security. The exercise of a put option written by the Fund is not
a taxable transaction for the Fund.

Any listed nonequity options written or purchased by the Fund
(including options on debt securities) will be governed by Section 1256 of the
Code. Absent a tax election to the contrary, gain or loss attributable to the
lapse, exercise or closing out of any such position will be treated as 60%
long-term and 40% short-term capital gain or loss, and on the last trading day
of the Fund's fiscal year, all outstanding Section 1256 positions will be marked
to market (i.e., treated as if such positions were closed out at their closing
price on such day), with any resulting gain or loss recognized as 60% long-term
and 40% short-term capital gain or loss.

Ordinarily, gains and losses realized from portfolio
transactions will be treated as capital gain or loss. However, all or a portion
of the gain or loss from the disposition of non-U.S. dollar denominated
securities (including debt instruments, certain financial forward, futures and
option contracts, and certain preferred stock) may be treated as ordinary income
or loss under

19
<PAGE> 38

Section 988 of the Internal Revenue Code. In addition, all or a portion of the
gain realized from the disposition of market discount bonds may be treated as
ordinary income under Section 1276 of the Internal Revenue Code. Generally, a
market discount bond is defined as any bond bought by the Fund after its
original issuance at a price below its face or accreted value. Finally, all or a
portion of the gain realized from engaging in "conversion transactions" may be
treated as ordinary income under Section 1258 of the Internal Revenue Code.
"Conversion transactions" are defined to include certain forward, futures,
option and straddle transactions, transactions marketed or sold to produce
capital gains, or transactions described in Treasury regulations to be issued in
the future.

Offsetting positions held by the Fund involving certain
financial forward, futures or options contracts (including certain foreign
currency forward contracts or options) may constitute "straddles." "Straddles"
are defined to include "offsetting positions" in actively traded personal
property. The tax treatment of "straddles" is governed by Sections 1092 and 1258
of the Internal Revenue Code, which, in certain circumstances, override or
modify the provisions of Sections 1256 and 988. If the Fund were treated as
entering into "straddles" by reason of its engaging in certain forward contracts
or options transactions, such "straddles" would be characterized as "mixed
straddles" if the forward contracts or options transactions comprising a part of
such "straddles" were governed by Section 1256. The Fund may make one or more
elections with respect to "mixed straddles." Depending on which election is
made, if any, the results to the Fund may differ. If no election is made to the
extent the "straddle" rules apply to positions established by the Fund, losses
realized by the Fund will be deferred to the extent of unrealized gain in the
offsetting position. Moreover, as a result of the "straddle" rules, short-term
capital loss on "straddle" positions may be recharacterized as long-term capital
loss, and long-term capital gains may be treated as short-term capital gains.

Under the Code, the Fund will be required to report to the
Internal Revenue Service all distributions of taxable income and capital gains
as well as gross proceeds from the redemption or exchange of Fund shares, except
in the case of certain exempt shareholders. Under the backup withholding
provisions of Section 3406 of the Code, distributions of taxable net investment
income and net capital gain and proceeds from the redemption or exchange of the
shares of a regulated investment company may be subject to withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to furnish the investment company with their taxpayer identification
numbers and with required certifications regarding their status under the
federal income tax law, or if the Fund is notified by the IRS or a broker that
withholding is required due to an incorrect TIN or a previous failure to report
taxable interest or dividends. If the withholding provisions are applicable, any
such distributions and proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.

Shareholders of the Fund may be subject to state and local
taxes on distributions received from the Fund and on redemptions of the Fund's
shares.

20
<PAGE> 39
Each distribution is accompanied by a brief explanation of the
form and character of the distribution. In January of each year the Fund issues
to each shareholder a statement of the federal income tax status of all
distributions.

The Fund is organized as a Massachusetts business trust and
generally will not be liable for any income or franchise tax in the Commonwealth
of Massachusetts. If the Fund qualifies as a regulated investment company for
federal income tax purposes and pays no federal income tax, it generally will
also not be liable for New York State income taxes, other than a nominal
corporation franchise tax (as adjusted by the applicable New York State
surtaxes).

The foregoing discussion is a general summary of certain of
the material U.S. federal income tax consequences to U.S. persons (as defined
below) of owning and disposing of shares in the Fund. This summary is based on
the provisions of the Code, final, temporary and proposed U.S. Treasury
Regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect on the date hereof, and all of which
are subject to change, possibly with retroactive effect.

The foregoing discussion of U.S. federal income tax law
relates solely to the application of that law to U.S. persons; i.e., U.S.
citizens and residents and U.S. domestic corporations, partnerships, estates the
income of which is includible in its gross income for U.S. federal income tax
purposes without regard to its source, or trusts if either: (i) a U.S. court is
able to exercise primary supervision over the administration of the trust and
one or more U.S. persons have the authority to control all the substantial
decisions of the trust or (ii) the trust was in existence on August 20, 1996
and, in general, would have been treated as a U.S. person under rules applicable
prior to such time, provided the trust elects to continue such treatment
thereafter. Each shareholder who is not a U.S. person should consider the U.S.
and foreign tax consequences of ownership of shares of the Fund, including the
possibility that such a shareholder may be subject to a U.S. withholding tax at
a rate of 30% (or at a lower rate under an applicable income tax treaty) on
amounts constituting ordinary income received by him or her.

This summary does not deal with all aspects of U.S. federal
income taxation that may be relevant to particular shareholders in light of
their particular circumstances. Accordingly, shareholders should consult their
tax advisers about the application of the provisions of tax law described in
this statement of additional information in light of their particular tax
situations.

ORGANIZATION AND CAPITALIZATION

General.

The Fund is an open-end investment company established under
the laws of the Commonwealth of Massachusetts by Declaration of Trust dated
April 12, 1982, as amended and restated on August 22, 1989 (the "Declaration of
Trust"). Previously known as the Risk Portfolio

21
<PAGE> 40
of The Ayco Fund, the Fund commenced doing business as The Merger Fund on
January 31, 1989. The Fund's name was formally changed to The Merger Fund on
August 22, 1989.

The Fund's activities are supervised by its Trustees, who are
elected by the Fund's shareholders. The Declaration of Trust permits the
Trustees to issue an unlimited number of full and fractional shares. The
Trustees are also empowered by the Declaration of Trust and the By-Laws to
create additional series of shares, or portfolios.

As permitted by Massachusetts law, there will normally be no
meetings of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees holding office have been
elected by shareholders. In such an event, the Trustees then in office will call
a shareholders' meeting for the election of Trustees. Except for the foregoing
and unless removed by action of the shareholders in accordance with the Fund's
By-Laws, the Trustee shall continue to hold office and may appoint successor
Trustees. The Trustees shall only be liable in cases of their willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties.

Shares of the Fund's common stock entitle their holders to one
vote per share. Shares have noncumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Trustees can
elect all Trustees and, in such event, the holders of the remaining shares
voting for the election of Trustees will not be able to elect any person or
persons as Trustees. Shares have no preemptive or subscription rights, and are
transferable. Each share represents an equal proportionate interest in the Fund.

The following entities each hold of record 5% or more of the
Fund's outstanding common stock as of December 31, 1999:

<TABLE>
<CAPTION>
NAME AND ADDRESS PERCENT HELD
<S> <C>
Charles Schwab & Co. Inc.
101 Montgomery Street
San Francisco, CA 94104-4122 28.15%

Merrill Lynch Pierce Fenner & Smith Inc.
250 Vesey Street
New York, NY 10281-1012 17.23%

National Financial Services Corp.
Church Street Station
P.O. Box 3908
New York, NY 10008-3908 16.08%
</TABLE>

22
<PAGE> 41

<TABLE>
<S> <C>
National Investor Services Corp. 6.29%
55 Water Street, 32nd Floor
New York, NY 10041-3299
</TABLE>

Shareholder and Trustee Liability.

The Fund is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Fund and
provides for indemnification out of Fund property of any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Management believes that, in view of the above, the risk of
personal liability of shareholders is remote. The Declaration of Trust does not
require the Fund to hold annual meetings of shareholders. However, the Fund will
hold special meetings when required by federal or state securities laws. The
holders of at least 10% of the Fund's outstanding shares have the right to call
a meeting of shareholders for the purpose of voting upon the removal of one or
more Trustees, and in connection with any such meeting, the Fund will comply
with the provisions of Section 16(c) of the Investment Company Act of 1940
relating to shareholder communications.

The Declaration of Trust further provides that the Trustees
will not be liable for errors of judgment or mistakes of fact or law, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.

ALLOCATION OF PORTFOLIO BROKERAGE

Subject to the supervision of the Trustees, decisions to buy
and sell securities for the Fund are made by the Adviser. The Adviser is
authorized by the Trustees to allocate the orders placed by it on behalf of the
Fund to brokers or dealers who may, but need not, provide research or
statistical material or other services to the Fund or the Adviser for the Fund's
use. Such allocation is to be in such amounts and proportions as the Adviser may
determine.

In selecting a broker or dealer to execute each particular
transaction, the Adviser will take the following into consideration: the best
net price available; the reliability, integrity and financial condition of the
broker or dealer; the size of and difficulty in executing the order; and the
value of the expected contribution of the broker or dealer to the investment
performance of the Fund on a continuing basis. Brokers or dealers executing a
portfolio transaction on behalf of the Fund

23
<PAGE> 42
may receive a commission in excess of the amount of commission another broker or
dealer would have charged for executing the transaction if the Adviser
determines in good faith that such commission is reasonable in relation to the
value of brokerage, research and other services provided to the Fund.

In allocating portfolio brokerage, the Adviser may select
brokers or dealers who also provide brokerage, research and other services to
other accounts over which the Adviser exercises investment discretion. Some of
the services received as the result of Fund transactions may primarily benefit
accounts other than the Fund, while services received as the result of portfolio
transactions effected on behalf of those other accounts may primarily benefit
the Fund. The Adviser is unable to quantify the amount of commissions set forth
below which were paid as a result of such services because a substantial number
of transactions were effected through brokers which provide such services but
which were selected principally because of their execution capabilities.

For the fiscal years ended September 30, 1997, 1998 and 1999,
the Fund paid brokerage commissions of approximately $2,298,674, $3,159,845 and
$3,859,910, respectively.

PORTFOLIO TURNOVER

The portfolio turnover rate may be defined as the ratio of the
lesser of annual sales or purchases to the monthly average value of the
portfolio, excluding from both the numerator and the denominator (1) securities
with maturities at the time of acquisition of one year or less and (2) short
positions. For the fiscal year ended September 30, 1999, the Fund's portfolio
annual turnover rate was 387%. The Fund will invest portions of its assets to
seek short-term capital appreciation. The Fund's investment objective and
corresponding investment policies can be expected to cause the portfolio
turnover rate to be substantially higher than that of the average
equity-oriented investment company.

Merger arbitrage investments are characterized by a high
turnover rate because, in general, a relatively short period of time elapses
between the announcement of a reorganization and its completion or termination.
The majority of mergers and acquisitions are consummated in less than six
months, while tender offers are normally completed in less than two months.
Liquidations and certain other types of corporate reorganizations usually
require more than six months to complete. The Fund will generally benefit from
the timely completion of the proposed reorganizations in which it has invested,
and a correspondingly high portfolio turnover rate would be consistent with,
although it would not necessarily ensure, the achievement of the Fund's
investment objective. Short-term trading involves increased brokerage
commissions, which expense is ultimately borne by the shareholders.

24
<PAGE> 43

Fund management believes that the fiscal 1999 portfolio
turnover rate of 387% is within the range to be expected for a merger arbitrage
fund, and anticipates that the 2000 rate will be within the same range or
somewhat lower.

INDEPENDENT ACCOUNTANTS

The Fund has selected PricewaterhouseCoopers LLP, 100 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202, as its independent accountants.

CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT,
ACCOUNTING SERVICES AGENT AND ADMINISTRATOR

Firstar Mutual Fund Services, LLC ("Firstar"), P.O. Box 701,
Milwaukee, Wisconsin 53201-0701 is the Fund's transfer agent and dividend paying
agent. Firstar Bank Milwaukee, N.A. ("Firstar Bank") acts as the Fund's
custodian.

The custody services performed by Firstar Bank include
maintaining custody of the Fund's assets, record keeping, processing of
portfolio securities transactions, collection of income, special services
relating to put and call options and making cash disbursements. Firstar Bank is
also custodian for The Merger Fund IRA Plan and trustee for the Fund Investors
Keogh Plans. Firstar Bank takes no part in determining the investment policies
of the Fund or in deciding which securities are purchased or sold by the Fund.
The Fund pays to Firstar Bank a custodian fee, payable monthly, at the annual
rate of .020% of the total value of the Fund's assets, plus a fee for each
transaction with respect to the Fund's portfolio securities, which varies
depending on the nature of the transaction.

Firstar is the Fund's transfer agent and dividend paying
agent. The transfer agent services provided by Firstar include: performing
customary transfer agent functions; making dividend and distribution payments;
administering shareholder accounts in connection with the issuance, transfer and
redemption of the Fund's shares; performing related record keeping services;
answering shareholders correspondence; mailing reports, proxy statements,
confirmations and other communications to shareholders; and filing tax
information returns. Firstar's transfer agent fee is equal to a maximum of
$15.00 per shareholder account.

Firstar also serves as the Fund's accounting services agent
and Fund Administrator. As such, Firstar provides a variety of administrative
and accounting services to the Fund, such as accounting relating to the Fund's
portfolio and portfolio transactions, the determination of net asset value and
pricing of the Fund's shares of beneficial interest, and maintaining the books
of account of the Fund. Accounting services for the Fund are provided pursuant
to a separate agreement with Firstar. The Fund pays Firstar a minimum annual fee
of $25,000 plus an additional .0175% of the value of the Fund's net assets in
excess of $40 million up to $200 million and .010% of the value of the Fund's
net assets in excess of $200 million.

25
<PAGE> 44

Under the Fund Administration Servicing Agreement, Firstar
maintains the books, accounts and other documents required by the Investment
Company Act of 1940; prepares the Fund's financial statements and tax returns;
prepares certain reports and filings with the Securities and Exchange
Commission; furnishes statistical and research data, clerical, accounting and
bookkeeping services and office supplies; and generally assists in all aspects
of the Fund's operations. Firstar, as Administrator, furnishes office space and
all necessary office facilities, equipment and executive personnel for
performing the services required pursuant to the agreement. For the foregoing,
the Fund pays Firstar a fee, payable monthly, at the annual rate of .065% of the
Fund's first $200 million of average aggregate daily net assets, .050% of the
next $200 million, .040% of the next $500 million and .030% of the Fund's
average daily net assets on the balance. The Fund also reimburses the
Administrator for all out-of-pocket expenses.

The fees charged to the Fund by Firstar for custody, transfer
agent, fund accounting and administration services are competitive with fees
charged by other providers of such services within the investment company
industry.

COUNSEL

The firm of Fulbright & Jaworski L.L.P. is counsel to the
Fund.

EXPERTS

The financial statements incorporated in this Statement of
Additional Information have been so incorporated in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants given on authority of said
firm, as experts in accounting and auditing.

FINANCIAL STATEMENTS

The statement of assets and liabilities, including the
schedules of investments, of options written and of securities sold short, as of
September 30, 1999, the related statements of operations and of cash flows for
the fiscal year ended September 30, 1999, statements of changes in net assets
for the fiscal years ended September 30, 1999 and September 30, 1998, financial
highlights, and notes to the financial statements and the independent
accountants' report to the Trustees and shareholders of the Fund dated November
12, 1999 are incorporated herein by reference to the Fund's Annual Report. A
copy of the Fund's Annual Report may be obtained without charge from Firstar by
calling (800) 343-8959.

Effective December 1, 1996, the Fund changed its fiscal year
to end on September 30 in each year, commencing with the fiscal year which ran
from December 1, 1996 through September 30, 1997.

26
<PAGE> 45
APPENDIX

Some of the terms used in this Statement of Additional
Information and the Fund's prospectus are described below.

Covered Option Writing.

A call option is a short-term contract which gives the
purchaser of the option, in return for a premium paid, the right to buy, and the
writer the obligation to sell, the underlying security at the exercise price at
any time upon the assignment of an exercise notice prior to the expiration of
the option, regardless of the market price of the security during the option
period. A covered call option is an option written on a security which is owned
by the writer throughout the option period.

The Fund will write covered call options both to reduce the
risks associated with certain of its investments and to increase total
investment return. In return for the premium income, the Fund will give up the
opportunity to profit from an increase in the market price of the underlying
security above the exercise price so long as its obligations under the contract
continue, except insofar as the premium represents a profit. Moreover, in
writing the option, the Fund will retain the risk of loss should the price of
the security decline, which loss the premium is intended to offset. Unlike the
situation in which the Fund owns securities not subject to a call option, the
Fund, in writing call options, must assume that the call may be exercised at any
time prior to the expiration of its obligations as a writer, and that in such
circumstances the net proceeds realized from the sale of the underlying
securities pursuant to the call may be substantially below the prevailing market
price. The Adviser may deem it desirable to close out a particular position
prior to the expiration of the option through the purchase of an equivalent
option, in which case the underlying security may either be sold or retained in
the Fund's portfolio.

Money Market Instruments.

Money market instruments are liquid, short-term, high-grade
debt instruments, including United States Government obligations, commercial
paper, certificates of deposit and bankers' acceptances.

Repurchase Agreements.

Repurchase agreements are agreements by which a person
purchases a security and simultaneously commits to resell that security to the
seller (a member bank of the Federal Reserve System or recognized securities
dealer) at an agreed upon price on an agreed upon date within a number of days
(usually not more than seven) from the date of purchase. The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to repurchase the securities at
the agreed upon price, which obligation is in effect secured

A-1
<PAGE> 46
by the value of the underlying security. The Fund may enter into repurchase
agreements with respect to obligations in which the Fund is authorized to
invest.

Short Selling.

A short sale is a transaction involving the sale of a security
that is not owned by the seller, the security having been borrowed from a third
party by the seller in order to make delivery to the buyer. In a transaction of
this type, the seller has a continuing obligation to replace the borrowed
security; and until such replacement, the broker retains the proceeds from the
sale and the seller is required to pay to the lender any dividends or interest
due to holders of the security. Although the seller's obligation to the lender
can be met by purchasing the security in the open market and delivering it
against the short position, the Fund will effect short sales only in
anticipation of replacing the borrowed security with an identical security
received upon the successful completion of a merger, acquisition or exchange
offer. (This strategy is illustrated by the following example: Company A
proposes to acquire Company B through a merger in which each outstanding common
share of Company B is exchanged for two shares of Company A. Assume that
following the announcement of the merger terms, Company A's stock is trading at
$20 while Company B's shares are trading at $35, or $5 below the market value of
Company A's offer (2 x $20 per A Share). Believing that the proposed merger
represents an attractive arbitrage opportunity, but wanting to protect against a
decline in the market price of Company A's stock prior to the completion of the
acquisition, the Fund purchases 1,000 shares of Company B at a total cost of
$35,000 plus commissions, and, at approximately the same time, borrows and sells
short 2,000 shares of Company A, yielding proceeds of $40,000 less commissions.
The Fund is now hedged; that is, a decline in the market price of Company A's
stock will not reduce the Fund's potential profit should the deal go through.
Upon completion of the merger, the 1,000 shares of Company B held by the Fund
are exchanged for 2,000 shares of Company A. These shares are then delivered to
the lender, thereby satisfying the Fund's obligation to replace the borrowed
shares, and the proceeds from the short sale become available to the Fund. In
this example a profit of $5,000 less commissions and any other expenses is
realized.) However, should the merger, acquisition or exchange offer be
terminated or otherwise not completed, the Fund will be required to satisfy its
obligation to the lender by making an open-market purchase, and to the extent
the price paid exceeds the proceeds from the short sale, the Fund will incur a
loss on the transaction. The amount of any such loss will be increased by the
amount of any dividends or interest the Fund may be required to pay in
connection with the short sale.

A-2
<PAGE> 47
PART C

OTHER INFORMATION

Item 23. Exhibits.

Exhibits
Required
By Form N-1A

Exhibit 1 Amended and Restated Declaration of Trust (Previously filed as
Exhibit 1 to Post-Effective Amendment No. 11 to the
Registration Statement.)

Exhibit 2 By-laws, as amended to date. (Previously filed as Exhibit 2 to
Post-Effective Amendment No. 11 to the Registration
Statement.)

Exhibit 3 Inapplicable.

Exhibit 4 Investment Advisory Contract between the Fund and Westchester
Capital Management, Inc., dated January 31, 1989. (Previously
filed as Exhibit 5 to Post-Effective Amendment No. 11 to the
Registration Statement.)

Exhibit 5 Second Amended and Restated Distribution Contract between the
Fund and Mercer Allied Corporation, dated as of July 1, 1993.
(Previously filed as Exhibit 6 to Post-Effective Amendment No.
16 to the Registration Statement.)

Exhibit 6 Inapplicable.

Exhibit 7 Custodian Agreement between the Fund and Firstar Trust
Company, dated April 1, 1994. (Previously filed as Exhibit 8
to Post-Effective Amendment No. 17 to the Registration
Statement.)

Exhibit 8-1 Transfer Agent Agreement between the Fund and Firstar Trust
Company, dated April 1, 1994. (Previously filed as Exhibit
9-1 to Post-Effective Amendment No. 17 to the Registration
Statement.)

Exhibit 8-2 Fund Accounting Servicing Agreement between the Fund and
Firstar Trust Company, dated April 1, 1994. (Previously filed
as Exhibit 9-2 to Post-Effective Amendment No. 17 to the
Registration Statement.)
<PAGE> 48
Exhibit 8-3 Fund Administration Servicing Agreement between the Fund and
Firstar Trust Company, dated September 30, 1994. (Previously
filed as Exhibit 9-3 to Post-Effective Amendment No. 18 to the
Registration Statement.)

Exhibit 8-4 Services Agreement between the Fund and Charles Schwab & Co.,
Inc. dated December 8, 1994. (Previously filed as Exhibit 9-4
to Post-Effective Amendment No. 18 to the Registration
Statement.)

Exhibit 8-5 Operating Agreement between the Fund and Charles Schwab & Co.,
Inc. dated December 8, 1994. (Previously filed as Exhibit 9-5
to Post-Effective Amendment No. 18 to the Registration
Statement.)

Exhibit 9 Opinion of Counsel as to Legality of Securities Being
Registered.

Exhibit 10 Consent of PricewaterhouseCoopers LLP.

Exhibit 11 Inapplicable.

Exhibit 12 Inapplicable.

Exhibit 13 The Merger Fund Plan of Distribution Pursuant to Rule 12b-1
dated July 14, 1998. (Previously filed as Exhibit 13 to
Post-Effective Amendment No. 22 to the Registration
Statement.)

Exhibit 14 Financial Data Schedule.

Exhibit 15 Inapplicable.

Exhibit 16 Code of Ethics.

Item 24. Persons Controlled by or Under Common Control with Registrant.

Inapplicable.

Item 25. Indemnification.

The Trustees and officers of the Registrant are insured under
a directors' and officers' liability insurance policy against
loss incurred solely because of their positions as Trustees
and officers of the Registrant. The policy coverage is,
however, subject to a number of exclusions.

The Trustees and officers of the Registrant will be
indemnified by Mercer Allied Company, L.P. under its
Distribution Contract with the Registrant for expenses
reasonably incurred in connection with any claim, action, suit
or proceeding which actually or allegedly arises out of any
actual or alleged misrepresentation or omission

C-2
<PAGE> 49
to state a material fact on the distributor's part unless such
misrepresentation or omission was made in reliance upon
written information furnished by the Registrant.

ARTICLE IV of the Registrant's Amended and Restated
Declaration of Trust provides as follows:

ARTICLE IV

LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS

Section 4.1. No Personal Liability of Shareholders, Trustees, Etc. No
Shareholder shall be subject to any personal liability whatsoever to any Person
in connection with Trust Property or the acts, obligations or affairs of the
Trust. No Trustee, officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than to the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust,
save only that arising from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties with respect to such Person; and all such
Persons shall look solely to the Trust Property for satisfaction of claims of
any nature arising in connection with the affairs of the Trust. If any
Shareholder, Trustee, officer, employee, or agent, as such, of the Trust, is
made a party to any suit or proceeding to enforce any such liability of the
Trust, he shall not, on account thereof, be held to any personal liability. The
Trust shall indemnify and hold each Shareholder harmless from and against all
claims and liabilities, to which such Shareholder may become subject by reason
of his being or having been a Shareholder, and shall reimburse such Shareholder
for all legal and other expenses reasonably incurred by him in connection with
any such claim or liability. The indemnification and reimbursement required by
the preceding sentence shall be made only out of the assets of the one or more
Series of which the Shareholder who is entitled to indemnification or
reimbursement was a Shareholder at the time the act or event occurred which gave
rise to the claim against or liability of said Shareholder. The rights accruing
to a Shareholder under this Section 4.1 shall not impair any other right to
which such Shareholder may be lawfully entitled, nor shall anything herein
contained restrict the right of the Trust to indemnify or reimburse a
Shareholder in any appropriate situation even though not specifically provided
herein.

Section 4.2. Non-Liability of Trustees, Etc. No Trustee, officer,
employee or agent of the Trust shall be liable to the Trust, its Shareholders,
or to any Shareholder, Trustee, officer, employee, or agent thereof for any
action or failure to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of trust) except for
his own bad faith, willful misfeasance, gross negligence or reckless disregard
of the duties involved in the conduct of his office.

Section 4.3. Mandatory Indemnification. (a) Subject to the exceptions
and limitations contained in paragraph(b) below:

C-3
<PAGE> 50
(i) every person who is, or has been, a Trustee or officer of the Trust
shall be indemnified by the Trust to the fullest extent permitted by law against
all liability and against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his being or having been a Trustee
or officer and against amounts paid or incurred by him in the settlement
thereof;

(ii) the words "claim," "action," "suit," or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal, administrative or
other, including appeals), actual or threatened; and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities.

(b) No indemnification shall be provided hereunder to a
Trustee or officer:

(i) against any liability to the Trust, a Series thereof, or the
Shareholders by reason of a final adjudication by a court or other body before
which a proceeding was brought that he engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office;

(ii) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that his
action was in the best interest of the Trust;

(iii) in the event of a settlement or other disposition not involving a
final adjudication as provided in paragraph (b)(i) or (b)(ii) resulting in a
payment by a Trustee or officer, unless there has been a determination that such
Trustee or officer did not engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office:

(A) by the court or other body approving the
settlement or other disposition; or

(B) based upon a review of readily available facts
(as opposed to a full trial-type inquiry) by (x) vote of a majority of the
Disinterested Trustees acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the matter) or (y) written opinion
of independent legal counsel.

(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust, shall be severable, shall
not affect any other rights to which any Trustee or officer may now or hereafter
be entitled, shall continue as to a Person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs, executors, administrators
and assigns of such a Person. Nothing contained herein shall affect any rights
to indemnification to which personnel of the Trust other than Trustees and
officers may be entitled by contract or otherwise under law.

(d) Expenses of preparation and presentation of a defense to
any claim, action, suit or proceeding of the character described in paragraph
(a) of this Section 4.3 may be advanced by the Trust prior to final disposition
thereof upon receipt of an undertaking by or on behalf of the

C-4
<PAGE> 51
recipient to repay such amount if it is ultimately determined that he is not
entitled to indemnification under this Section 4.3, provided that either:

(i) such undertaking is secured by a surety bond or some other
appropriate security provided by the recipient, or the Trust shall be insured
against losses arising out of any such advances; or

(ii) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees act on the matter) or an
independent legal counsel in a written opinion shall determine, based upon a
review of readily available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the recipient ultimately will be found
entitled to indemnification.

As used in this Section 4.3, a "Disinterested Trustee" is one
who is not (i) an Interested Person of the Trust (including anyone who has been
exempted from being an Interested Person by any rule, regulation, or order of
the Commission), or (ii) involved in the claim, action, suit or proceeding.

Section 4.4. No Bond Required of Trustees. No Trustee shall be
obligated to give any bond or other security for the performance of any of his
duties hereunder.

Section 4.5. No Duty of Investigation; Notice in Trust Instruments,
Etc. No purchaser, lender, transfer agent or other Person dealing with the
Trustees or any officer, employee or agent of the Trust shall be bound to make
any inquiry concerning the validity of any transaction purporting to be made by
the Trustees or by said officer, employee or agent or be liable for the
application of money or property paid, loaned, or delivered to or on the order
of the Trustees or of said officer, employee or agent. Every obligation,
contract, instrument, certificate, Share, other security of the Trust or
undertaking, and every other act or thing whatsoever executed in connection with
the Trust shall be conclusively presumed to have been executed or done by the
executors thereof only in their capacity as Trustees under this Declaration or
in their capacity as officers, employees or agents of the Trust. Every written
obligation, contract, instrument, certificate, Share, other security of the
Trust or undertaking made or issued by the Trustees may recite that the same is
executed or made by them not individually, but as Trustees under the
Declaration, and that the obligations of the Trust under any such instrument are
not binding upon any of the Trustees or Shareholders, individually, but bind
only the Trust Property, and may contain any further recital which they or he
may deem appropriate, but the omission of such recital shall not operate to bind
the Trustees individually. The Trustees shall at all times maintain insurance
for the protection of the Trust Property, its Shareholders, Trustees, officers,
employees and agents in such amount as the Trustees shall deem adequate to cover
possible tort liability, and such other insurance as the Trustees in their sole
judgment shall deem advisable.

Section 4.6. Reliance on Experts, Etc. Each Trustee and officer or
employee of the Trust shall, in the performance of his duties, be fully and
completely justified and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the books of account or other records
of the Trust, upon an opinion of counsel, or upon reports made to the Trust by
any of

C-5
<PAGE> 52
its officers or employees or by the Investment Adviser, the Distributor,
Custodian, Transfer Agent, selected dealers, accountants, appraisers or other
experts or consultants selected with reasonable care by the Trustees, officers
or employees of the Trust, regardless of whether such counsel or expert may also
be a Trustee.

Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.

Item 26. Business and Other Connections of Investment Adviser.

Westchester Capital Management, Inc., the Registrant's
investment adviser, also manages merger arbitrage accounts for
high-net-worth individuals and other institutional investors.
The information required by this Item 26 with respect to each
director, officer or partner of Westchester Capital
Management, Inc. is incorporated by reference to Schedules A
and D of Form ADV filed by Westchester Capital Management,
Inc. pursuant to the Investment Advisers Act of 1940 (SEC File
No.
801-15556).

Item 27. Principal Underwriters.

(a) Inapplicable

(b) Mercer Allied Company, L.P.

The information required by this Item 27 with respect
to each officer or partner of Mercer Allied Company,
L.P. is incorporated by reference to Schedule A of
Form BD filed by Mercer Allied pursuant to the
Securities Exchange Act of 1934 (SEC File No.
8-20745).

C-6
<PAGE> 53
(c) Principal Underwriter: Mercer Allied Company, L.P.

<TABLE>
<S> <C>
Net underwriting discounts and commissions: $0.
Compensation for redemption and repurchase: $0.
Brokerage commissions: $0.
Other compensation: $59,027 (Rule 12b-1 fees).
</TABLE>

Item 28. Location of Accounts and Records.

Certain accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of
1940 and the Rules thereunder are maintained at the offices of
the Registrant at 100 Summit Lake Drive, Valhalla, New York
10595 and at the offices of the Registrant's transfer agent
and custodian, Firstar Trust Company, 615 East Michigan
Street, Milwaukee, Wisconsin 53202.

Item 29. Management Services.

Inapplicable.

Item 30. Undertaking.

Inapplicable.

C-7
<PAGE> 54

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 (the "Act")
and the Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the County of Westchester and State of New York, on the 26th
day of January, 2000.

THE MERGER FUND

By /s/Frederick W. Green
------------------------------
Frederick W. Green,
President

Pursuant to the requirements of the Act, this Registration Statement
has been signed below by the following persons in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/Frederick W. Green President January 26, 2000
- ------------------------------
Frederick W. Green & Trustee

/s/Bonnie L. Smith Vice-President, January 26, 2000
- ------------------------------
Bonnie L. Smith Treasurer & Secretary

/s/James P. Logan III Trustee January 26, 2000
- ------------------------------
James P. Logan III

/s/Michael J. Downey Trustee January 26, 2000
- ------------------------------
Michael J. Downey
</TABLE>

C-8
<PAGE> 55
EXHIBIT INDEX

EXHIBIT DESCRIPTION PAGE
Exhibit 1- Amended and Restated Declaration of Trust (Previously
filed as Exhibit 1 to Post-Effective Amendment No. 11
to the Registration Statement.)

Exhibit 2- By-laws, as amended to date. (Previously filed as
Exhibit 2 to Post-Effective Amendment No. 11 to the
Registration Statement.)

Exhibit 3- Inapplicable.

Exhibit 4- Investment Advisory Contract between the Fund and
Westchester Capital Management, Inc., dated January 31,
1989. (Previously filed as Exhibit 5 to Post-Effective
Amendment No. 11 to the Registration Statement.)

Exhibit 5- Second Amended and Restated Distribution Contract
between the Fund and Mercer Allied Corporation, dated
as of July 1, 1993. (Previously filed as Exhibit 6 to
Post-Effective Amendment No. 16 to the Registration
Statement.)

Exhibit 6- Inapplicable.

Exhibit 7- Custodian Agreement between the Fund and Firstar
Trust Company, dated April 1, 1994. (Previously filed
as Exhibit 8 to Post-Effective Amendment No. 17 to the
Registration Statement.)

Exhibit 8-1- Transfer Agent Agreement between the Fund and Firstar
Trust Company, dated April 1, 1994. (Previously filed
as Exhibit 9-1 to Post-Effective Amendment No. 17 to
the Registration Statement.)

Exhibit 8-2- Fund Accounting Servicing Agreement between the Fund
and Firstar Trust Company, dated April 1, 1994.
(Previously filed as Exhibit 9-2 to Post-Effective
Amendment No. 17 to the Registration Statement.)

Exhibit 8-3- Fund Administration Servicing Agreement between the
Fund and Firstar Trust Company, dated September 30,
1994. (Previously filed as Exhibit 9-3 to Post-
Effective Amendment No. 18 to the Registration
Statement.)

Exhibit 8-4- Services Agreement between the Fund and Charles Schwab
& Co., Inc. dated December 8, 1994. (Previously filed
as Exhibit 9-4 to Post-Effective Amendment No. 18 to
the Registration Statement.)

Exhibit 8-5- Operating Agreement between the Fund and Charles Schwab
& Co., Inc. dated December 8, 1994. (Previously filed
as Exhibit 9-5 to Post-Effective Amendment No. 18 to
the Registration Statement.)

Exhibit 9- Opinion of Counsel as to Legality of Securities Being
Registered.

Exhibit 10- Consent of PricewaterhouseCoopers LLP.

Exhibit 11- Inapplicable.

Exhibit 12- Inapplicable.

Exhibit 13- The Merger Fund Plan of Distribution Pursuant to Rule
12b-1 dated as of July 14 1998. (Previously filed as
Exhibit 13 to Post-Effective Amendment No. 22 to the
Registration Statement.)

Exhibit 14- Financial Data Schedule.
<PAGE> 56
Exhibit 15- Inapplicable.

Exhibit 16- Code of Ethics.

<PAGE> 1
EXHIBIT 9

[FULBRIGHT & JAWORSKI L.L.P. LETTERHEAD]

January 26, 2000

The Merger Fund
100 Summit Lake Drive
Valhalla, New York 10595

Re: Registration Statement on Form N-1A
Securities Act File No. 2-76969/
Investment Company Act File No. 811-3445

Ladies and Gentlemen:

This will refer to the Registration Statement under the Securities Act
of 1933 (File No. 2- 76969) and Investment Company Act of 1940 (File No.
811-3445), filed by The Merger Fund (the "Fund"), a Massachusetts business
trust, with the Securities and Exchange Commission and the further amendments
thereto (the "Registration Statement"), covering the registration under the
Securities Act of 1933 of an indefinite number of shares of beneficial interest
of the Fund (the "Shares").

As counsel to the Fund, we have examined such documents and reviewed
such questions of law as we deem appropriate. On the basis of such examination
and review, it is our opinion that the Shares have been duly authorized and,
when issued, sold and paid for in the manner contemplated by the Registration
Statement, will be legally issued, fully paid and non-assessable.

We consent to the use of this opinion as an exhibit to the Registration
Statement and the reference to this firm under the heading "Counsel" in the
Statement of Additional Information filed as part of the Registration Statement.
This consent is not to be construed as an admission that we are a person whose
consent is required to be filed with the Registration Statement under the
provisions of the Securities Act of 1933.

Very truly yours,

/s/Fulbright & Jaworski L.L.P.

<PAGE> 1

EXHIBIT 10

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our report dated November 12, 1999 , relating to the
financial statements and financial highlights which appears in the September 30,
1999 Annual Report to Shareholders of The Merger Fund, which is also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the headings "Financial Highlights", "Experts" and
"Independent Accountants" in such Registration Statement.

PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin

January 26, 2000

<ARTICLE> 6
<CIK> 0000701804
<NAME> THE MERGER FUND

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<INVESTMENTS-AT-COST> 712,648,097
<INVESTMENTS-AT-VALUE> 705,585,099
<RECEIVABLES> 298,066,435
<ASSETS-OTHER> 47,243,117
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,050,894,651
<PAYABLE-FOR-SECURITIES> 39,568,750
<SENIOR-LONG-TERM-DEBT> 162,600,000
<OTHER-ITEMS-LIABILITIES> 273,276,514
<TOTAL-LIABILITIES> 475,445,264
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 550,047,397
<SHARES-COMMON-STOCK> 37,451,606
<SHARES-COMMON-PRIOR> 30,667,591
<ACCUMULATED-NII-CURRENT> 510,322
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 32,897,016
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (8,005,348)
<NET-ASSETS> 575,449,387
<DIVIDEND-INCOME> 4,691,108
<INTEREST-INCOME> 8,924,807
<OTHER-INCOME> 0
<EXPENSES-NET> (11,142,593)
<NET-INVESTMENT-INCOME> 2,473,322
<REALIZED-GAINS-CURRENT> 54,231,596
<APPREC-INCREASE-CURRENT> 24,245,755
<NET-CHANGE-FROM-OPS> 80,950,673
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,109,498)
<DISTRIBUTIONS-OF-GAINS> (25,528,920)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 34,234,589
<NUMBER-OF-SHARES-REDEEMED> (29,554,687)
<SHARES-REINVESTED> 2,104,113
<NET-CHANGE-IN-ASSETS> 149,057,023
<ACCUMULATED-NII-PRIOR> 5,458,760
<ACCUMULATED-GAINS-PRIOR> 21,084,792
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,549,174
<INTEREST-EXPENSE> 3,270,434
<GROSS-EXPENSE> 11,142,593
<AVERAGE-NET-ASSETS> 455,413,584
<PER-SHARE-NAV-BEGIN> 13.90
<PER-SHARE-NII> 0.08
<PER-SHARE-GAIN-APPREC> 2.71
<PER-SHARE-DIVIDEND> (0.22)
<PER-SHARE-DISTRIBUTIONS> (1.10)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.37
<EXPENSE-RATIO> 1.38

</TABLE>

<PAGE> 1
WESTCHESTER CAPITAL MANAGEMENT, INC.
THE MERGER FUND
CODE OF ETHICS

1. Statement of General Principles

This Code of Ethics expresses the policy and procedures of
Westchester Capital Management, Inc., its affiliates and subsidiaries
("Westchester") and The Merger Fund (the "Fund"), and is enforced to insure that
no one is taking advantage of his or her position, or even giving the appearance
of placing his or her own interests above those of the Fund. Investment company
personnel must at all levels act as fiduciaries, and as such must place the
interests of the shareholders of the Fund before their own. Thus, we ask that
when contemplating any personal transaction you ask yourself what you would
expect or demand if you were a shareholder of the Fund.

Rule 17j-1(a) under the Investment Company Act of 1940 (the
"Act"), included as Appendix A attached hereto, makes it unlawful for certain
persons, in connection with the purchase or sale of securities, to, among other
things, engage in any act, practice or course of business which operates or
would operate as a fraud or deceit upon a registered investment company. In
compliance with paragraph (b)(1) of Rule 17j-1, this Code contains provisions
that are reasonably necessary to eliminate the possibility of any such conduct.
We ask that all personnel follow not only the letter of this Code but also abide
by the spirit of this Code and the principles articulated herein.

2. Definitions

"Access Person" shall mean any trustee, officer, general
partner, Portfolio Manager, Advisory Person or Investment Personnel of the Fund
or the Adviser, who in the ordinary course of
<PAGE> 2
his or her business makes, participates in or obtains information regarding the
purchase or sale of securities for the Fund or whose functions or duties as part
of the ordinary course of his or her business relate to the making of any
recommendation to the Fund regarding the purchase or sale of securities.

"Adviser" shall mean Westchester, or such other entity as may
act as adviser or sub-adviser to the Fund.

"Advisory Person" of the Fund means any employee of the Fund
or the Adviser (or of any company in a control relationship with the Fund or the
Adviser) who, in connection with his or her regular functions or duties, makes,
participates in, or obtains information regarding the purchase or sale of a
security by the Fund, or whose functions relate to the making of any
recommendations with respect to such purchases or sales, and shall include any
natural person in a control relationship with the Fund or the Adviser who
obtains information concerning recommendations made to the Fund with regard to
the purchase or sale of a security.

The term "beneficial ownership" shall be interpreted in the
same manner as it would be in determining whether a person is subject to the
provisions of Section 16 of the Securities Exchange Act of 1934 and the rules
and regulations thereunder, except that the determination of direct or indirect
beneficial ownership shall apply to all securities which a person subject to
this Code has or acquires.

"Control" shall have the same meaning as that set forth in
Section 2(a)(9) of the Act.

"Disinterested Trustee" of the Fund shall mean a trustee
thereof who is not an "interested person" of the Fund within the meaning of
Section 2(a)(19) of the Act.

-2-
<PAGE> 3
"Fund" shall mean any investment company, registered as such
under the Act, for which Westchester acts as investment adviser or
sub-investment adviser.

"Investment Personnel" of the Fund or the Adviser includes
Fund Portfolio Managers and those persons who provide information and advice to
the Portfolio Managers or who help execute the Portfolio Managers' decisions
(e.g., securities analysts and traders).

"Portfolio Managers" of the Fund shall mean those persons who
have direct responsibility and authority to make investment decisions for the
Fund.

The term "security" shall have the meaning set forth in
Section 2(a)(36) of the Act and shall include options, but shall not include
securities issued or guaranteed by the United States government or its agencies
or instrumentalities, short-term debt securities which are "government
securities" within the meaning of Section 2(a)(16) of the Act, bankers'
acceptances, bank certificates of deposit, commercial paper, shares of
registered open-end investment companies and such other money market instruments
as may be designated by the Board of Trustees of the Fund.

The "purchase or sale of a security" includes, among other
things, the writing of an option to purchase or sell a security.

Appendix B provides definitions of and supplemental
information on the following terms: beneficial ownership, control, interested
person, security and government securities.

3. Prohibited Transactions

The prohibitions described below will only apply to a
transaction in a security in which the designated person has, or by reason of
such transaction acquires, any direct or indirect beneficial ownership.

-3-
<PAGE> 4
A. Blackout Trading Periods - Access Persons

No Access Person shall execute a securities transaction on a
day during which the Fund has a pending buy or sell order in that same security
until that order is executed or withdrawn. Any profits realized on trades within
the proscribed periods are required to be disgorged to the Fund.

B. Blackout Trading Periods - Portfolio Managers

No Portfolio Manager shall buy or sell a security within seven
calendar days before and after the Fund that he or she manages trades in that
security. Any profits realized on trades within the proscribed periods are
required to be disgorged to the Fund.

C. Ban on Short-Term Trading Profits - Investment Personnel

Investment Personnel may not profit in the purchase and sale,
or sale and purchase, of the same (or equivalent) securities within 60 calendar
days. Any profits realized on such short-term trades are required to be
disgorged to the Fund.

D. Ban on Securities Purchases of an Initial Public
Offering - Investment Personnel

Investment Personnel may not acquire any securities in an
initial public offering without the prior written consent of the Fund's Legal
Compliance Officer. The Legal Compliance Officer is required to retain a record
of the approval of, and the rationale supporting, any direct or indirect
acquisition by Investment Personnel of a beneficial interest in securities in an
IPO. Furthermore, should written consent of the Fund be given, Investment
Personnel are required to disclose such investment when participating in the
Fund's subsequent consideration of an investment in such issuer. In such
circumstances, the Fund's decision to purchase securities of the issuer should

-4-
<PAGE> 5
be subject to an independent review by Investment Personnel of the Fund with no
personal interest in the issuer.

E. Securities Offered in a Private Offering - Investment
Personnel

Investment Personnel may not acquire any securities in a
private offering without the prior written consent of the Fund's Legal
Compliance Officer. The Legal Compliance Officer is required to retain a record
of the approval of, and the rationale supporting, any direct or indirect
acquisition by Investment Personnel of a beneficial interest in securities in a
private offering. Furthermore, should written consent of the Fund be given,
Investment Personnel are required to disclose such investment when participating
in the Fund's subsequent consideration of an investment in such issuer. In such
circumstances, the Fund's decision to purchase securities of the issuer should
be subject to an independent review by Investment Personnel of the Fund with no
personal interest in the issuer.

4. Exempted Transactions

A. Subject to compliance with preclearance procedures in
accordance with Section 5 below, the prohibitions of Sections 3A, 3B and 3C of
this Code shall not apply to:

(i) Purchases or sales effected in any account over which
the Access Person has no direct or indirect influence
or control, or in any account of the Access Person
which is managed on a discretionary basis by a person
other than such Access Person and with respect to
which such Access Person does not in fact influence
or control such transactions.

-5-
<PAGE> 6
(ii) Purchases or sales of securities which are not
eligible for purchase or sale by the Fund.

(iii) Purchases or sales which are nonvolitional on the
part of either the Access Person or the Fund.

(iv) Purchases which are part of an automatic dividend
reinvestment plan.

(v) Purchases effected upon the exercise of rights issued
by an issuer pro rata to all holders of a class of
its securities, to the extent such rights were
acquired from such issuer, and sales of such rights
so acquired.

(vi) All other transactions contemplated by Access Persons
of the Fund which receive the prior approval of the
Legal Compliance Officer in accordance with the
preclearance procedures described in Section 5 below.
Purchases or sales of specific securities may receive
the prior approval of the Legal Compliance Officer
because the Legal Compliance Officer has determined
that no abuse is involved and that such purchases and
sales would be very unlikely to have any economic
impact on the Fund or on the Fund's ability to
purchase or sell such securities.

B. Notwithstanding Section 4A(vi), the prohibition in Section 3A shall
not apply to Disinterested Trustees, unless a Disinterested Trustee, at the time
of a transaction, knew or, in the ordinary course of fulfilling his or her
official duties as a trustee of the Fund, should have known that the Fund had a
pending buy or sell order in that same security, which order had not yet been
executed or withdrawn.

-6-
<PAGE> 7
C. A transaction by Access Persons (other than Investment Personnel)
inadvertently effected during the period proscribed in Section 3A will not be
considered a violation of the Code and disgorgement will not be required so long
as the transaction was effected in accordance with the preclearance procedures
described in Section 5 and without prior knowledge of any Fund trading.

D. Notwithstanding Section 4A(vi), the prohibition in Section 3C shall
not apply to profits earned from transactions in securities which securities are
not the same (or equivalent) to those owned, shorted or in any way traded by the
Fund during the 60-day period; provided, however, that if the Legal Compliance
Officer determines that a review of the Access Person's reported personal
securities transactions indicates an abusive pattern of short-term trading, the
Legal Compliance Officer may prohibit such Access Person from profiting in the
purchase and sale, or sale and purchase, of the same (or equivalent) securities
within 60 calendar days whether or not such security is the same (or equivalent)
to that owned, shorted or in any way traded by the Fund.

5. Preclearance

Access Persons (other than Disinterested Trustees) must
preclear all personal investments in securities. All requests for preclearance
must be submitted to the Legal Compliance Officer. Such requests shall be made
by submitting a Personal Investment Request Form, in the form annexed hereto as
Appendix C. All approved orders must be executed by the close of business on the
day preclearance is granted. If any order is not timely executed, a request for
preclearance must be resubmitted.

Disinterested Trustees need not preclear their personal investments in
securities unless a Disinterested Trustee knows, or in the course of fulfilling
his or her official duties as a

-7-
<PAGE> 8
Disinterested Trustee should know, that, within the most recent 15 days, the
Fund has purchased or sold, or considered for purchase or sale, such security or
is proposing to purchase or sell, directly or indirectly, any security in which
the Disinterested Trustee has, or by reason of such transaction would acquire,
any direct or indirect beneficial ownership.

6. Reporting

A. Access Persons (other than Disinterested Trustees) are required to
direct their broker(s) to supply to the Legal Compliance Officer on a timely
basis duplicate copies of confirmations of all personal securities transactions
and copies of periodic statements for all securities accounts. Access Persons
(other than Disinterested Trustees) of the Fund should direct their broker(s) to
transmit to the Legal Compliance Officer of the Adviser duplicate confirmations
of all transactions effected by such Access Person, and copies of the statements
of such brokerage accounts, whether existing currently or to be established in
the future. A sample letter for this purpose is attached as Appendix D. The
transaction reports and/or duplicates should be addressed "Personal and
Confidential." The report submitted to the Legal Compliance Officer may contain
a statement that the report shall not be construed as an admission by the person
making such report that he or she has any direct or indirect beneficial
ownership in the security to which the report relates. Compliance with this Code
requirement will be deemed to satisfy the reporting requirements imposed on
Access Persons under Rule 17j-1(c).

B. A Disinterested Trustee shall report to the Fund's Legal Compliance
Officer, no later than ten days after the end of the calendar quarter in which
the transaction to which the report relates was effected, the information
required in Appendix E hereto with respect to any securities

-8-
<PAGE> 9
transaction in which such Disinterested Trustee has, or by reason of such
transaction acquires, any direct or indirect beneficial ownership in a security
that such Disinterested Trustee knew, or in the course of fulfilling his or her
official duties as a trustee should have known, during the 15-day period
immediately preceding or after the date of the transaction by the Disinterested
Trustee, to have been purchased or sold by the Fund or considered for purchase
or sale by the Fund. With respect to those transactions executed through a
broker, a Disinterested Trustee of the Fund may fulfill this requirement by
directing the broker(s) to transmit to the Legal Compliance Officer a duplicate
of confirmations of such transactions, and copies of the statements of such
brokerage accounts, whether existing currently or to be established in the
future. The transaction reports and/or duplicates should be addressed "Personal
and Confidential." The report submitted to the Legal Compliance Officer may
contain a statement that the report shall not be construed as an admission by
the person making such report that he or she has any direct or indirect
beneficial ownership in the security to which the report relates. Transactions
effected for any account over which a Disinterested Trustee does not have any
direct or indirect influence or control, or which is managed on a discretionary
basis by a person other than the Disinterested Trustee and with respect to which
such Disinterested Trustee does not in fact influence or control such
transactions, need not be reported. Further, transactions in securities which
are not eligible for purchase or sale by the Fund of which such person is a
Disinterested Trustee need not be reported.

C. Whenever an Access Person recommends that the Fund purchase or sell
a security, he or she shall disclose whether he or she presently owns such
security, or whether he or she is considering its purchase or sale.

-9-
<PAGE> 10
D. On a quarterly basis Access Persons (other than Disinterested
Trustees) will disclose all personal securities transactions. In addition, each
Access Person will be required to provide an initial holdings report listing all
securities beneficially owned by him or her no later than 10 days after becoming
an Access Person, as well as an annual holdings report containing similar
information that must be current as of a date no more than 30 days before the
report is submitted. On an annual basis Access Persons (other than Disinterested
Trustees) will be sent a copy of the Fund's statement of such Access Person's
personal securities accounts to verify its accuracy and make any necessary
additions or deletions.

E. The Legal Compliance Officer is required to review all transaction
and holdings reports submitted by Access Persons and the Fund must maintain a
list of the name(s) of such persons responsible for such reviews.

F. All personal matters discussed with the Legal Compliance Officer and
all confirmations, account statements and personal investment reports shall be
kept in confidence, but will be available for inspection by the Board of
Trustees of the Fund and the President of the Adviser for which such person is
an Access Person, and by the appropriate regulatory agencies.

G. The Adviser is required, at least once a year, to provide the Fund's
Board with a written report that (1) describes issues that arose during the
previous year under the Code or procedures applicable to the Fund, including,
but not limited to, information about material Code or procedures violations and
sanctions imposed in response to those material violations and (2) certifies to
the Fund's Board that the Fund has adopted procedures reasonably necessary to
prevent its Access Persons from violating its Code of Ethics.

-10-
<PAGE> 11
7. Annual Certification

On an annual basis, Access Persons will be sent a copy of this
Code for their review. Access Persons will be asked to certify that they have
read and understand this Code and recognize that they are subject hereto. Access
Persons will be further asked to certify annually that they have complied with
the requirements of this Code and that they have disclosed or reported all
personal securities transactions required to be disclosed or reported pursuant
to this Code. A sample of the certification is attached as Appendix F. 8.
Confidential Status of the Fund's Portfolio

The current portfolio positions of the Fund managed, advised
and/or administered by the Adviser and current portfolio transactions, programs
and analyses must be kept confidential.

If nonpublic information regarding the Fund's portfolio should
become known to any Access Person, whether in the line of duty or otherwise, he
or she should not reveal it to anyone unless it is properly part of his or her
work to do so.

If anyone is asked about the Fund's portfolio or whether a
security has been sold or bought, his or her reply should be that this is an
improper question and that this answer does not mean that the Fund has bought,
sold or retained the particular security. Reference, however, may, of course, be
made to the latest published report of the Fund's portfolio.

9. Nonpublic Material Information

From time to time, the Adviser has circulated and discussed
with Access Persons the latest administrative and judicial decisions regarding
the absolute prohibition against the use of nonpublic material information, also
known as "inside information." In view of the many forms in

-11-
<PAGE> 12
which the subject can arise, the Adviser must reiterate that a careful and
conservative approach must prevail and no action should be taken where "inside
information" may be involved without a thorough review by the Legal Compliance
Officer.

Material inside information is any information about a company
or the market for the company's securities which has come directly or indirectly
from the company and which has not been disclosed generally to the marketplace,
the dissemination of which is likely to affect the market price of any of the
company's securities or is likely to be considered important by reasonable
investors, including reasonable speculative investors, in determining whether to
trade in such securities.

Information should be presumed "material" if it relates to
such matters as dividend increases or decreases, earnings estimates, changes in
previously released earnings estimates, significant expansion or curtailment of
operations, a significant increase or decline of orders, significant merger or
acquisition proposals or agreements, significant new products or discoveries,
extraordinary borrowing, major litigation, liquidity problems, extraordinary
management developments, purchase or sale of substantial assets, etc.

"Inside information" is information that has not been publicly
disclosed. Information received about a company under circumstances which
indicate that it is not yet in general circulation and that such information may
be attributable, directly or indirectly, to the company (or its insiders) should
be deemed to be inside information.

Whenever an Access Person receives material information about
a company which he or she knows or has reason to believe is directly or
indirectly attributable to such company (or its

-12-
<PAGE> 13
insiders), the Access Person must determine that the information is public
before trading or recommending trading on the basis of such information or
before divulging such information to any person who is not an employee of the
Adviser or a party to the transaction. As a rule, one should be able to point to
some fact to show that the information is generally available; for example, its
announcement on the broad tape or by Reuters, The Wall Street Journal or trade
publications. If the Access Person has any question at all as to whether the
information is material or whether it is inside and not public, he or she must
resolve the question or questions before trading, recommending trading or
divulging the information. If any doubt at all remains, the Access Person must
consult with the Legal Compliance Officer.

10. Gifts - Investment Personnel

Investment Personnel shall not receive any gift or other thing
having a value in excess of $250 per year from any person or entity that does
business with or on behalf of the Fund.

11. Services as a Director in a Publicly Traded Company - Investment
Personnel

Investment Personnel shall not serve on the boards of
directors of publicly traded companies, absent prior authorization by the Fund's
Board of Trustees, based upon a determination that the board service would be
consistent with the interests of the Fund and its shareholders. When such
authorization is provided, the Investment Personnel serving as a director will
be isolated from making investment decisions with respect to the pertinent
company through "Chinese Wall" or other procedures.

12. Compliance Review

A. The Legal Compliance Officer shall compare the reported personal
securities transactions with completed and contemplated portfolio transactions
of the Fund to determine

-13-
<PAGE> 14
whether a violation of this Code may have occurred. Before making any
determination that a violation has been committed by any person, the Legal
Compliance Officer shall give such person an opportunity to supply additional
information regarding the transaction in question.

13. Sanctions

The Board of Trustees of the Fund or the President of the
Adviser, as the case may be, will be informed of Code violations on a quarterly
basis and may impose such sanctions as it deems appropriate, including inter
alia, a letter of censure or suspension or termination of employment of the
Access Person or a request for disgorgement of any profits received from a
securities transaction done in violation of this Code.

14. Fund Board of Trustees Review

Annually, the Fund's Board of Trustees shall receive the
following:

A. A copy of the existing Code of Ethics.

B. A report completed by the Legal Compliance Officer identifying
any violations requiring significant remedial action during
the past year and as more fully set forth under Section 6G
above.

C. A list of recommendations, if any, to change the existing Code
of Ethics based upon experience, evolving industry practices
or developments in applicable laws or regulations.

The Fund's Board of Trustees, including a majority of the
independent Trustees, shall approve this Code of Ethics, as well as any material
changes thereto within six months of any such change. The Board shall base its
approval of the Code, or of such material change to the Code, upon

-14-
<PAGE> 15
a determination that the Code contains provisions reasonably necessary to
prevent "Access Persons" (as defined in the Rule) from violating the anti-fraud
provisions of the Rule.

-15-