Interview with Alexandre Rampa, Syz Asset management SA – February 14th 2013 ushered in the USD23billion purchase of HJ Heinz by Warren Buffett and 3G Capital. Perhaps unsurprisingly, Syz Asset Management has a positive stance on event-driven managers this year as signs point to improved corporate activity.
In its latest commentary report, the firm points out that amid continuing political and economic uncertainty, it favours managers that rely on idiosyncratic situations and “specific” triggers to generate returns. Hedge funds that employ event-driven strategies have returned 7.27 per cent over the last 12 months according to Hedge Fund Research.
In a recent KPMG survey, 35 per cent of respondents said they are more optimistic about the M&A market than they were a year ago.
Indeed, as Syz Asset Management points out, the last quarter of 2012 was the best quarter for global activity since Q3 2008, with USD694billion of deal announcements. “We believe that merger activity will continue to increase into the year, fueled by a better board room confidence and by healthy balance sheets,” says Alexandre Rampa, co-head of hedge fund investments, Syz Asset Management. He notes that the volume of corporate actions – including stock repurchases, payments of substantial dividends as well as mergers and acquisitions – will “increase sharply”.
As a result, Syz has been steadily increasing its allocation to “risk seeking” strategies, including event-driven, since last summer. “This trend will continue throughout 2013, unless the macroeconomic landscape changes. In a typical Multi-Strategy fund, event-driven allocations range between 15 and 25 per cent, usually across seven to 10 managers.”
Corporate balance sheets are in rude health right now. Rampa estimates that global liquidity is in the region of USD3.5trillion as company executives have remained risk averse in deploying capital in recent years because of so much market dislocation. But that conservative sentiment might be beginning to change.
Expanding on the house view for why the event-driven sector is more compelling, Rampa continues: “In Europe, the ratio of cash on assets in 2012 reached a record high at 12.3 per cent. With lower systemic risk in Europe, they can now act with much more determination. This is especially true as economic growth prospects remain modest and the exercise of costs cutting in order to increase margins is accomplished. In Europe, we have seen a near 70 per cent increase in volumes versus the previous quarter. Finally, the number of managers and the amount of capital able to take advantage of these opportunities declined sharply since the 2008 crisis, resulting in a bigger cake for a fewer number of players.”
Rampa says that as a result Syz is advising its clients to increase their allocations as “above average returns” are expected in the coming months. But it’s not only recommending merger arbitrage. “We also include Credit Value and Special Situations in this strategy. We anticipate higher dispersion in the credit market due to the lack of market-making and anticipate a more selective market going forward.”
Not that event-driven strategies are without risk. They are prone to suffer from large drawdowns and don’t perform well when liquidity dries up. To counteract this, Rampa confirms that since early 2012 Syz has implemented a tail hedging program into the vast majority of its funds. “This protection remains in place in 2013 and aims to protect our portfolios against a major tail event. It is, in effect, a barbell strategy.”