Activist hedge funds and certain other special situations strategies are still holding off from piling into longer-term buy-and-hold stocks amid the continued market uncertainty, instead choosing to trade opportunistically around cyclical names recovering from their coronavirus battering.
Managers running special situations funds have made hay in the recent recovery in cyclical names, but “have not shown the same appetite for bargains than in previous sell-offs,” Lyxor Asset Management strategists said this week.
Traditionally, event driven and activist funds tend to underperform in risk-off markets due to their long structural beta, but typically rebound quicker by eschewing short-term volatility patterns.
They saw their performance squeezed during Q1’s historic sell-off thanks to sizeable exposures in energy and consumer stocks, which tumbled sharply, strategists observed in a note.
But concentrated and buy-and-hold special situations managers appear reluctant to add much risk, despite the recent market rebound.
“While market corrections usually open buying windows for special situations and activist strategies, we find that, since the market crash, global activists launched less than 30 new campaigns,” said Jean-Baptiste Berthon and Philippe Ferreira, senior strategists, and Jamai Montassar, hedge fund analyst.
Activist hedge fund managers gained more than 10 per cent last month, according to new data released by Hedge Fund Research this week. May also saw special situations funds advance 9.21 per cent, HFRI noted, with merger arbitrage-focused strategies rising almost 6 per cent. However, on a year-to-date basis, activists remain down 21 per cent, special sits have fallen 10.66 per cent, and merger arb funs have lost 4.83 per cent.
Most of the new campaigns launched recently focus on mid- or small-cap names in financials and industrials, with mixed credit solidity, still trading at considerable discounts.
“The lead objectives of these campaigns seem opportunist,” the strategists said, mainly involving discussions or building stakes, rather than more fundamental situations that demand governance change, asset sales, or other more far-reaching turnaround or restructuring measures.
Elsewhere, managers are opportunistically picking up cheaper names still under pressure from the virus – such as aerospace, REITs, financial services, and leisure businesses – which have trended upwards recently.
“Corporate activity is still far from pre-crisis level,” Lyxor said. “M&A, asset sales, IPOs, which are critical in special situations’ exit strategies, remain anaemic.”
Strategists added: “Encouragingly, the number of extraordinary shareholder meetings, where most corporate operations are decided, are healthily rebounding. It suggests corporate activity will normalise along with trading conditions.”
