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Event-driven top-performing sector over the past 12 months, says Credit Suisse/Tremont

The event-driven hedge fund strategy, which includes the distressed, multi-strategy and risk arbitrage sub-sectors, was the top performing sector over the past 12 months with an average return of 15.62 per cent, according to Credit Suisse, which says the sector has benefited from a wide range of opportunities directly related to corporate capital structures.

'Event-driven hedge fund managers can shift exposures based upon opportunities in merger and acquisition activity, global market conditions, distressed corporate situations and other corporate activities to produce attractive returns across both short- and long-term investment horizons,' says Credit Suisse Index Co. in its latest commentary upon the hedge fund market, entitled Event Driven for All Seasons.

 'Event-driven hedge funds, as represented by the Credit Suisse/Tremont Event Driven Hedge Fund Index, have historically produced high returns with low levels of volatility. The Sharpe ratio for the past 10 years was 1.26.'

According to the report, many event-driven managers are able operate with flexibility across the entire capital structure, enabling managers potentially to play every aspect of a trade over time, picking spots in a companies' capital structure where they think the most attractive risk/return positions lie.

Credit Suisse says the recent growth in number of number of global M&A deals, due to both a consolidation of industries and falling trade barriers, has resulted in a particularly rich environment for event-driven managers, while the increased volume of leveraged buyouts has also driven M&A activity, leading to more opportunities for hedge fund managers;

In a developing trend, the report says, event-driven funds have joined traditional banks as lenders, allowing corporations to assume more debt, refinance their loans, avoid bankruptcy and continue to grow.

Event-driven managers may apply disciplined hedging and careful portfolio construction techniques, which means that in a year like 2002 that was marked by a severe dislocation triggered by accounting frauds and high-profile bankruptcies such as Enron and WorldCom, event-driven hedge funds were only down 5.94 per cent.

This compares with a drop of 14.19 per cent for the MSCI World index and of 6.24 per cent for the CS High Yield Index. The Credit Suisse/Tremont Event Driven Hedge Fund Index managers have demonstrated negative correlation during equity and credit market drops, the report says, but have shown increasingly positive correlation when markets rally.

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