Managers of funds of hedge funds expect returns from equity hedge funds to improve and favour event driven strategies, says Standard & Poor’s Fund Services in its latest update on the sector.
“Fund managers are looking at company balance sheets that are flush with cash that is earning next to nothing given current rates of interest,” says S&P Fund Services lead analyst, Randal Goldsmith. “With debt financing readily available, they expect corporate takeovers to soar, providing a strong opportunity for event driven managers.”
Event driven strategies were positive for HDF funds over Q3 2010 and the manager, Christophe Jaubert, is retaining exposure. HDF’s investment team is optimistic that the M&A theme will continue, as firms are cash-rich and struggling to generate growth organically.
Charles Hovenden, who manages the Absolute Fund, rated AA by S&P Fund Services, reiterated this view.
“The fund currently only has one merger arbitrage manager, so Hovenden is looking to add two more in the future to take advantage of the opportunities that arise,” says Goldsmith.
David Smith, chief investment officer of GAM, also sees good returns coming from event-driven.
“The GAM funds remain overweight to event-driven strategies as Smith sees a favourable medium- to longer-term environment, despite some short-term challenges,” says Goldsmith.
Improved returns in Q3, with a strong recovery by equity hedge fund managers in September, lifted year-to-date performance back into positive territory. High correlation within equity markets has constrained performance for equity hedge funds, but some managers believe that correlations will begin to break down as investors recognise and move to exploit mispricing, benefiting this strategy. However, as at the beginning of October, fixed income focused strategies have been the strongest performers in the current year.
