Aberdeen Standard is bullish on merger arbitrage and long/short equity hedge funds

Chargin Bull Wall Street

Aberdeen Standard Investments is bullish on event driven merger arbitrage hedge funds amid a surge in deal volumes, while equity long/short and activist managers are also tipped to capitalise on the continued fallout from the coronavirus pandemic.

Outlining Aberdeen’s hedge fund outlook for the quarter, Duncan Moir, senior investment manager, alternative investment strategies at Aberdeen Standard Investments in London, pointed to attractive merger arbitrage spreads, bolstered by a strong deal flow towards the end of last year.

“Some of our managers have seen some of the best returns that they’ve had in a long time, and I think a lot of that has to do with the volatility in the market causing some pretty attractive spreads,” Moir told Hedgeweek.

“There are managers who have been nimble, and have the ability trade around as spreads widened due to broader market volatility, as well as volatility in specific deals .”

Historically, merger arb has often performed well coming out of volatile periods.

“A lot of that volatility may not necessarily have put deals on hold, but it possibly scared off a lot of investors. We saw some unbelievable spreads in March last year, and there are still some pretty good spreads.”

Elsewhere, the allocator’s optimism on long/short equity strategies centres around how certain stock-picking strategies have weathered the fallout from the coronavirus pandemic.

“It’s very much a call on the true stock pickers,” Moir explained of Aberdeen’s outlook, adding the pandemic has created opportunities to find winners and losers across an assortment of markets and sectors. 

Equity long/short was one of the strongest performing hedge fund strategies over the past year, generating more than 26 per cent, Aberdeen’s outlook noted.

However, Moir warned certain stocks which thrived during the early stages of the pandemic may not necessarily maintain that momentum further down the line, which he said underlines the importance of an individual portfolio manager’s skillset.

Meanwhile, activist managers can tap into “deep value” situations where companies often look “ridiculously priced” in both directions.

“That’s always good for activists because they can quite often unlock value quite quickly, especially in what seems like very cheap companies,” he said.

“Activism as a strategy can be quite volatile because it tends to be directional.  The volatility, if anything, creates buying opportunities for managers who are building positions before they before they actually start to engage with companies.”