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During the first five months of the year, record mergers and acquisitions (M&A) levels drove outperformance among event-driven hedge funds. Meanwhile, new data shows that the largest hedge funds are growing the fastest, despite their smaller rivals’ traditional outperformance, at a time when hedge fund performance has begun to improve across the board.
JULY 25, BEVERLY HILLS, CALIFORNIA: Discovery’s President and CEO On July 25, 2019, in Beverly Hills, California, David Zaslav addresses onstage at… [+] the Discovery, Inc.’s Summer 2019 TCA Tour at The Beverly Hilton Hotel. (Photo courtesy of Getty Images for Discovery/Amanda Edwards)
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Following a 1.6 percent rise in May, the HFM Event-Driven Composite Index gained 11.9 percent in the first five months of the year. According to a recent analysis from HFM, the performance gains were assisted by record levels of M&A activity during the first five months of the year. This year has seen a number of significant transactions, including WarnerMedia’s merger with Discovery Inc, activist campaigns, and the growth of SPAC arbitrage schemes.
Another reason event-driven managers have outperformed this year, according to Linsey Lebowitz Hughes of Duke University’s Department of Economics. Due to discretionary positioning and high leverage levels, macro-driven strategies perform best during periods of volatility, according to her. Because they are so well-informed, she believes event-driven managers do well during tumultuous periods.
In an email, Lebowitz Hughes stated, “In my perspective, macro managers are among of the most well-informed managers on the planet, which is a great partner to have heading into a period of predicted inflation.” “They are extremely skilled at assessing the interplay between asset classes, have a thorough understanding of global financial markets, and have a keen awareness of geopolitical factors.”
She also believes that astute investors see the value of well-informed event-driven managers and are “eager to fill up their macro investment bucket with lots of clever, global macro managers who just “get it” and are well-positioned for the next chapter.”
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Additionally, $5.6 billion in inflows drew investors to event-driven funds, bringing the niche’s year-to-date flows to $2.1 billion.
Three factors, according to Lebowitz Hughes, are driving increasing interest in event-driven funds this year. Return chasing, which she described as “always a popular sport in HF investment,” a surge in pent-up post-COVID M&A activity, and a rebound from 2020, which was a poor year for event managers, are among them.
“It’s like a tiny version of what occurred to Convertible Arbitrage managers from a bad year in 2008 to a great year in 2009,” Lebowitz Hughes said. “The opportunity set is rich, and event managers are eager to acquire funds so they can have dry powder for this cycle,” says the author.
Event-driven funds performed significantly worse than other strategies in the early months of COVID-19, according to HFM data. Last year, the strategy suffered huge outflows, despite performing well near the end of the year.
HFM recently looked into inflows to large funds that are members of its “Billion Dollar Club,” in addition to event-driven fund strategies. During last year’s epidemic, the global hedge fund sector made a comeback, with assets in HFM’s Billion Dollar Club reaching new highs.
According to the journal, corporations managing more than $1 billion shrank 5% in the first half of last year to $2.57 trillion, but returned 10% in the second half to $2.83 trillion. Over the course of a year, the Billion Dollar Club’s assets increased by 5%, with 22 companies joining the club. Compared to a decade ago, billion-dollar funds today handle two-thirds more assets.
Following a rebound from massive first-quarter losses as the epidemic expanded, forcing unprecedented lockdowns and the fastest bear market ever recorded, global hedge funds averaged a return of 12.1 percent last year. In 2020, global net asset flows were negative, which had no impact on the Billion Dollar Club data.
Inflows began to recover in the second half of 2020, according to HFM, and have increased this year. By around $67 billion, global allocations have surpassed redemptions. According to the business, Billion Dollar Club funds with assets under management of $10 billion saw the most substantial growth in the second half of 2020, owing to strong gains and investors’ preference for the “perceived safety of larger firms.”
The aggregate assets of funds with more than $10 billion in assets increased by 13% to $1.45 trillion in the second half of the year, while those with $5 billion to $10 billion in assets increased by 12%. Funds with assets of $3 billion to $5 billion were unchanged, while those with assets of $1 billion to $3 billion increased by 5%. The assets of the smallest hedge funds, on the other hand, increased in both halves of last year.
More data shows that larger hedge fund managers are growing the fastest and collecting a disproportionate amount of inflows, according to Lebowitz Hughes. She claims that pension funds are to blame for much of the excessive growth, and that they are the least invested in hedge funds, devoting only a small percentage of their investable capital to them.
“As pension funds have gotten more familiar with HFs and have gradually increased their HF portfolios, their attitude has become more conservative and risk-averse,” says Lebowitz Hughes. “As a result, larger, more seasoned managers with extended track records and a history of consistent performance are the most appealing pension partners.”
She went on to say that many pension funds have put the larger managers to the test and found them to be trustworthy when it comes to managing stormy markets.
“While newer, smaller managers may be able to outperform some of these mega-managers,” Lebowitz Hughes explains, “many don’t have the extensive history and institutional structure that major pension funds require to feel safe.” “Pension funds are also known for being long-term investors. They want it to be modest and consistent; they don’t want to be exposed to the potentially disastrous AUM volatility that might occur in smaller managers when short-term investors redemption.”/nRead More

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