After several years of tepid interest, event-driven hedge
fund strategies are back in fashion as
investors rush to capitalize on the boom in mergers and
acquisitions. Event-driven funds received $9.65 billion in
net inflows in March, more than any other strategy, according
to suburban Atlantabased data provider eVestment.
Event-driven investing involves making a return from
predicting corporate events that will affect the stock price of
a particular company. This includes mergers, acquisitions and
The recent rush of inflows into event-driven funds reflects
a sense among investors that the renaissance in M&A is more
than a passing fad. We started to allocate to
event-driven strategies in the fourth quarter of 2013 because
companies were sitting on record levels of cash, much of which
we felt would be used for acquisitions, says Arnaud
Gandon, chief investment officer at Heptagon Capital, an $8.4
billion investment management firm based in London.
Figures from eVestment show a 6.3 percent return among hedge
funds using event-driven strategies for the six-month period
ended March 31. This is the greatest return from any hedge fund
strategy except for that of distressed assets, which itself
often relies on event-driven investments.
This latest M&A boom was put into motion by corporate
cash stored up during the recession. Between 2008 and
2013 the focus of CEOs was to mend their balance sheets and pay
dividends creating a lot of cash for their companies
until they felt comfortable with the global economic
environment, says Nicolas Campiche, Geneva-based CEO of
$14.7 billion Pictet Alternative Investments, part of the
Pictet banking and asset management group, which as of
September 30 had $433 billion in assets under management.
Were now at the juncture where M&A activity is
rising because CEO confidence is rising.
Global volume for M&A deals launched in the first four
months of the year totaled $1.3 trillion, one of the heaviest
quarters since 1998.
Recent big M&A events include the U.S. pharmaceutical
giant Pfizers ongoing moves to take over U.K.-Swedish
pharmaceutical company AstraZeneca, General Electric Co.s
$16.9 billion offer for French company Alstoms energy
business and Comcasts $45.2 billion bid for Time Warner
Interest in event-driven has also grown in part because of
the relative unattractiveness of other hedge fund strategies.
In this current market, event-driven is clearly better
than credit strategies, equity long-short and global
macro, says Troy Gayeski, partner and senior portfolio
manager at SkyBridge Capital, a New Yorkbased
fund-of-hedge-funds firm with $10.5 billion under
Credit strategies tend to produce lower gains when yields in
the underlying market are relatively low, as they are now. When
it comes to equity long-short, Gayeski cites the increase in
correlations among individual equities because of aggressive
central bank monetary policy. In the case of global macro, he
blames the absence of explosive events, which send markets
rising and falling sharply, and the long-term trend for
different asset markets to become more correlated with one
another. The latter makes it hard for macro managers to take
bets on one and against another. Also, event-driven strategies
generally have a high correlation with stock markets.
Is the high correlation a virtue or a vice? Gayeski says it
does not make event-driven strategies attractive on their own,
but it is a secondary attraction for those
investors who predict further stock market rises in response to
the improving global economy. In terms of upside capture,
event-driven is at the top, he says, providing more
upside in strong equity markets than any other hedge fund
Some investors are keen to reduce the beta (stock market
volatility) in their portfolios, while accepting that it cannot
be eliminated entirely. Gandon of Heptagon says event-driven
managers help do that. Investors say that merger arbitrage, by
which investors buy the shares of the company being acquired
and short the shares of the acquirer to capture the difference
between the present and final prices, does not produce
sufficiently high returns. Skeptics note that in the present
environment it is difficult to achieve returns on this of more
than 6 percent. Instead, investors in hedge fund strategies
prefer managers who seek higher returns by anticipating likely
M&A by going long in a stock that is likely to be an
M&A target and shorting another company in the same sector
that is unlikely to garner the same attention. By doing this,
they achieve a relatively modest beta, of 0.3 or 0.4.
Event-driven strategies do hold positive virtues, that is,
if managers can win the guessing game of in which sector the
next mergers are likely to be. Event-driven investors mention
pharmaceutical and telecom as two areas of further
consolidation in the coming months.
One characteristic of event-driven strategies that
isnt easy to mitigate is their correlation to the
business cycle. They usually do better during times when high
levels of corporate cash and confidence generate significant
levels of M&A. The key question for institutional investors
is, therefore, How long the current good times will last?
Looking back at recent decades, Gayeski estimates that most
M&A cycles last 18 months to three years and that the
present cycle began in January. That leaves, he says, at the
very least more than a year of opportunity for event-driven
strategies based on M&A.
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