Event driven hedge funds latch onto M&A boom, as potential for returns has “never been better”

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M&A

Event driven hedge funds are making hay amid soaring levels of corporate activity, with new stats showing these managers raked in their best first-quarter returns in almost 30 years, as a number of newly-launched strategies look to get a piece of the M&A action.

Event driven managers – which seek to capitalise on stock mispricings and other valuation anomalies stemming from mergers and acquisitions, bankruptcies, takeovers and other corporate events using activist, merger arbitrage and special situations strategies – posted a first quarter composite return of 7.3 per cent, according to new research by bfinance, their strongest Q1 showing since 1993.

M&A activity has rapidly picked up momentum since the third quarter of 2020, and since the start of 2021 volumes have risen to more than USD2.4 trillion globally, as economies look to recover from Covid-19 and deals put on hold during the pandemic are kickstarted.

Against that backdrop, event driven strategies advanced 11.7 per cent in the first five months of 2021, according to data published by Hedge Fund Research, outflanking HFR’s industry-wide Fund Weighted Composite Index, which was up 9.92 per cent over the same period.

Within the event driven sphere, both activist-focused strategies and special situations funds lead the way, up more than 14 per cent year-to-date, according to HFR metrics. Distressed and restructuring strategies have gained more than 13 per cent, and merger arb managers have gained more than 9 per cent between January and the end of May.

As the resurgence in corporate M&A activity gathers pace, a slew of managers are looking to capitalise on the ripening opportunity set with new fund launches.

Merger arbitrage specialist Felix Lo – who previously managed money at Sandell Asset Management and Izzy Englander’s Millennium Management – recently joined Trium Capital to lead a new USD200 million global event driven strategy.

The Trium Khartes Event Driven Fund will focus on a broad set of merger and corporate events across the spectrum, aiming to generate alpha from relatively under-covered small and mid-cap situations globally.

“The volume and size of deals in 2021 is outstripping available capital, leading to wider deal spreads and above-average returns,” Lo said.

Elsewhere, London-based GWM Asset Management last month unveiled a novel USD270 million European merger arbitrage fund which uses ESG (environmental, social and governance) factors in its position-building process to tap into the demand for sustainability-focused investing.

Investors, meanwhile, continue to pour money into the sector: event driven assets now account for USD590 billion, or 19 per cent, of the USD3 trillion-plus total global hedge fund assets, eVestment stats show.

Toby Goodworth, managing director, head of liquid markets at bfinance, believes the potential for investors to generate “usefully different and diversifying” returns has “perhaps never been better”.

“Even if the pace of new deals tapers off in the second half of 2021, we don’t anticipate any immediate slackening of opportunity in the current market,” Goodworth said.

“Many of the recently announced mergers will take months to play out; in the meantime, event-driven managers are continuing to take advantage of the trading opportunities brought about by continuing deal flow, record levels of new issuance in equity and convertible bond markets, and broad acceptance of SPAC-financed IPOs.”

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Hugh Leask
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