M&A surge boosts event driven and merger arb hedge funds amid potential Q4 risk aversion

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Merger arbitrage and event driven hedge fund strategies can capitalise on the recent pick-up in M&A activity globally, and help cushion investors’ portfolios amid potential risk aversion as a result of the US election, Brexit and a fresh Covid-19 surge in Q4, industry strategists say.

The volume of M&A deals plummeted to USD96 billion in April this year – the lowest level since August 2009 during the height of the global financial crisis – as a result of heightened concerns over the coronavirus pandemic, said Man Group in a market commentary on Tuesday.

In recent weeks, though, activity has surged across a wide range of sectors globally as deals that had been put on ice because of Covid-19 began flowing back into the market.

More than USD1 trillion of deals across the world reportedly came to market during the third quarter, and in a market commentary on Tuesday, London-listed global hedge fund giant Man said volumes bounced back “both in terms of volumes, but also as a proportion of market cap.”

Against that backdrop, Lyxor Asset Management believes that merger arbitrage-focused hedge fund strategies will offer “diversification and protection” for investor portfolios during the fourth quarter of 2020.

Merger arbitrage strategies advanced 1.65 per cent last month – one of the few hedge fund sub-sets that were in positive territory in September – according to recent data published by Hedge Fund Research.

In Lyxor’s latest Cross Asset Research Quarterly update, strategists favour event driven strategies – which aim to capitalise on stock mis-pricings and disruptions stemming from an assortment of market events including mergers, acquisitions and takeovers – over traditional long/short equity hedge fund strategies.

Event driven funds – which include a range of activist, distressed, special situations and arbitrage strategies – were up 0.27 per cent overall in September, HFR said.

Meanwhile, Man Group added that the recent M&A spike will also prove a key source of market liquidity – along with a spike in the US government’s current account – which should stave off any potential liquidity crunch after the Federal Reserve eased cash injections over the summer following its USD3 trillion boost between March and May.

Earlier this month, Rhenman & Partners Asset Management’s CIO and founding partner Henrik Rhenman said the “very impressive” pick-up in M&A activity within the global healthcare sector helped drive the firm’s performance during September.