Event-driven hedge fund managers expect big opportunity — and big profits — in the growing level of merger, acquisition and other corporate activity this year.
“We see great investment opportunities in Europe and North America this year,” Thomas E. Sandell, CEO of Sandell Asset Management Corp., New York, said in an interview with Pensions & Investments during the SALT hedge fund industry conference in Las Vegas earlier this month.
Event-driven hedge fund managers generally are looking for a catalyst in a corporate situation. Those can include mergers and acquisitions internal restructurings, division spinoffs and moves into bankruptcy.
The results of the successful search for such catalysts has been strong performance of event-driven hedge funds, with the HFRI Event-Driven Total index returning 12.5% in the year ended Dec. 31, its best year since 2009, and 1.8% for the quarter ended March 31, the best among the broad strategy categories tracked by industry researcher Hedge Fund Research Inc., which manages the HFRI family of indexes.
While the number of M&A deals globally fell to 38,054 in 2013 from 43,695 in 2012 and 44,636 in 2011, the dollar value of deals rose to $2.9 trillion in 2013 from $2.7 trillion and $2.8 trillion in each of the prior years, data from Dealogic Ltd. show.
“Companies are finding the current environment conducive to making deals,” Terra A. Fuller, senior vice president and head of hedged equity, Mesirow Advanced Strategies Inc., said in an interview from her Chicago office.
The factors shaping an environment prime for event-driven hedge fund profits are a low-growth economy, low financing levels and corporate balance sheets plump with unused cash, she said.
The increased cash value of M&A deals is providing “validation for corporate management teams, encouraging them to take balance sheet cash and use it for M&A, rather than for share buybacks that were more common over the past few years,” Ms. Fuller said.
“We've been finding that event-driven and special-situation hedge fund strategies are a significant source of alpha now,” especially in the U.S. and Europe, said Ms. Fuller.
Mesirow Advanced Strategies manages $13.7 billion in hedge funds-of-funds strategies.
Mr. Sandell and other hedge fund managers specializing in one or all of the major subsets of the event-driven strategy category — activist, distressed/restructuring, merger arbitrage and special situations — agree about strong prospects for alpha generation.
Sandell Asset Management runs about $1 billion, mostly for institutional investors, in three event-driven strategies: credit opportunities; equity special situations; and merger arbitrage.
Mr. Sandell said Sandell's best event-driven opportunities now are in the firm's equity special situation strategy, especially a trend toward non-real estate companies converting into real estate investment trusts as a way to recapitalize. The data management company Iron Mountain Inc., for example, owns its underground data storage facilities, and has applied to become a REIT, Mr. Sandell said.
“There is a tremendous demand for yield in today's environment, with fixed-income trading almost at zero,” Mr. Sandell said. He noted REITs, by contrast, generally are trading at yields between 5% and 6%.
“High demand for yield creates great opportunities for REIT conversions,” he added.