As equity and bond markets look increasingly highly valued, investors are seeking diversified sources of returns to protect their portfolios.
A survey by Deutsche Bank suggests that while long/short equity funds have been the principal beneficiary of this, event-driven strategies have also picked up inflows. Such strategies have benefited from increasing merger and acquisition (M&A) activity as corporate confidence builds, driving higher returns.
Event-driven hedge funds have been among the top-performing strategies for the year to date. The average fund is up 4.12 per cent, with specialist activist funds up 6 per cent. Only long/short equity, directional credit and distressed debt funds are up further. The sector is building on a strong performance in 2013, where the average fund delivered 14.61 per cent, with the activist funds up 19.15 per cent, according to eVestment.
Antoine Mallard, founder and chief investment officer at D’Alembert Capital Management, says: “The more activist funds have performed best, lifted by a booming equity market and often a light or no hedging in their strategies. Even the vanilla risk arbitrage players have seen their performance go up as the number of transactions have significantly increased and with a number of major transactions being announced.”
Event-driven funds aim to take advantage of the mispricing of a stock that comes as a result of mergers, acquisitions or restructuring. The event-driven manager will look at the underlying value of the company, whether the ‘event’ is likely to be beneficial for the share price in the long term and how they can best exploit any anomalies in the market’s view of the deal. For example, if the manager believed the deal would be beneficial, he would buy the stock while the market was unsure.
Activist investors go one step further and attempt to force change on company boards. Headline-grabbing groups such as Pershing Square build stakes in companies and then use their position as shareholders to try and expose poor practice at companies and bring about strategic change. Pershing Square’s most high-profile campaign has been against weight-loss group Herbalife. Bill Ackman, head of the hedge fund, accused the group of “incredible fraud” and of operating a pyramid scheme. At the same time, he took significant short positions in the shares.
The M&A environment is vitally important for event-driven funds. Thomson Reuters data showed year-to-date global deal volume to the end of June had surged to $1.75trn (£1trn), up 75 per cent from a year ago. This represents the highest level since 2007 and is in large part a reflection of increasing corporate confidence. As the economy recovers, corporate management is more inclined to buy, sell and do deals.
At the time, Thomson Reuters predicted that the dealmaking frenzy could endure for as long as buyers were keen to take advantage of high stock prices, ample cash reserves and cheap available financing. But can this environment continue in the face of higher interest rates and geopolitical uncertainty?
