The US hedge fund industry is in rough shape as the Federal Reserve’s lift-all-boats monetary policy has made it increasingly difficult to beat the market. US hedge funds endured nearly $100 billion in redemptions last year, as only 30% of US equity funds beat their benchmarks. But as confidence in traditional stock pickers dwindles, so-called “event-driven” funds are attracting renewed interest in investors, particularly in Europe, where near-zero rates and relatively attractive valuations are expected to stoke a boom in M&A activity, Bloomberg reports.
After these funds experienced some high-profile stumbles in recent years – one such fund managed by John Paulson’s Paulson & Co. posted a 49% loss and endured billions of dollars in redemptions – some Europe-based funds are seeing billions in inflows. Kite Lake Capital Management, Everett Capital Advisors and Melqart Asset Management have garnered billions in fresh investor capital over the past two years.
“Kite Lake Capital Management almost doubled client assets this year, while Everett Capital Advisors nearly tripled its funds since launching in January 2016. The money overseen by Melqart Asset Management has grown 12-fold since the firm started less than two years ago.
The three event-driven funds have $1.5 billion in combined assets and invest across Europe, where an increasingly buoyant economy and record-low interest rates are boosting dealmaking. Their resurgence is part of a comeback effort by a hedge-fund industry that’s only now starting to recover from a wave of investor redemptions and years of disappointing returns.
'We like event-driven because there are lots of opportunities for them,’ said Philippe Ferreira, a strategist at Paris-based Lyxor Asset Management, which oversees $135 billion and is looking to increase its exposure to the strategy. Strong M&A volumes are rather good for merger arbitrage. They also have increased exposures to financials, which benefit from monetary policy normalization."
According to data from HFR via Bloomberg, event-driven funds returned on average 10% last year, more than twice the gains of the broader industry, and another 4 percent in the first five months of 2017. These gains occurred as the M&A failure rate was cut in half over the past 12 months, when US regulators opposed high-profile deals in the health-care, pharmaceuticals and telecom industries.
“This is luring investors back, particularly in Europe, where corporate earnings, faster growth and reduced political risk following elections in France helped boost European M&A volumes to $508 billion this year, up 14 percent from the same period of 2016. Transactions include Johnson & Johnson’s takeover of Swiss drugmaker Actelion Ltd.
Melqart said its assets have grown to $500 million from a launch size of $40 million in October 2015, with the fund making 48 percent for investors.
Kite Lake, which returned 13 percent last year, oversees about $625 million, up from $355 million in December, according to a company official. And the Everett Opportunities Fund said it’s getting closer to achieving the $550 million level at which it plans to shut to new money. The hedge fund made 10 percent for investors last year.”
Still, despite the rosy outlook, investors have continued to pull money from M&A-focused funds this year – though the pace of outflows has slowed somewhat. Investors pulled less than $4 billion from event-driven funds during the first four months of 2017, compared with about $60 billion over 2015 and 2016. Meanwhile, the number of new funds being launched rose during the first quarter for the first time in 12 months. The industry has attracted net inflows of $12 billion so far this year, helping push the AUM of hedge funds globally to a record $3.1 trillion.
Indeed, it seems the industry is beginning to recover after the industry saw its largest outflows last year since 2009 - making 2016 only the third year on record where investors pulled more capital than they allocated.
Bloomberg claims that the picture for event-driven funds outside Europe is somewhat less rosy as US merger volumes fall nearly 11 percent to $751 billion, following two strong years where companies spent trillions on M&A. Yet some US funds are already reaping hundred-million-dollar paydays from their merger bets. Amazon’s purchase of Whole Foods Market was a coup for activist hedge fund Jana Partners, which owns nearly 10% of WFM. After that highly publicized windfall, we wouldn’t be surprised if investors start asking their money managers to explore similar strategies.