Cheyne fundraising points to bright future for event-driven strategies
GLOBAL - London hedge fund manager Cheyne Capital Management has raised more than $100m for its Event Driven fund since launch a year ago with about half coming from European and UK pension funds.
Cheyne said the rest of the inflows came from investors in the US and Asia.
Event-driven funds have proved popular with investors and now account for about one quarter of hedge fund assets. They took in $5.8bn of net new assets in the first half of this year, second only to relative-value funds, which enjoyed $9.9bn net inflows, said data provider Hedge Fund Research.
Investors said this growth is likely to continue as the outlook for the event-driven strategy's two main prongs - investment around M&A and investing long and short in distressed company debt remains bright.
Distressed debt returned 5.1% as of 31 August this year, while merger arbitrage made 2.5%, said HFR. The average hedge fund made 1.7%.
Phil Irvine, co-founder of pension consultants PiRho Investment Consulting, said: "Merger arbitrage is expected to perform well over the medium term. Many commentators feel that, given the tough economic environment, companies that re-financed and have low leverage could aim to grow profits by seeking to consolidate or take over others.
"As the strategy is far more dependent on the skills of the manager in exploiting the event rather than the overall direction of equities, it can add to the efficiency of portfolio construction."
In 2008 event-driven lost 21.8%, HFR said, a stark contrast to its 15.3% gains in 2006 and 6.6% in 2007, while some practitioners estimate 80% of event-driven funds and bank proprietary desks focused on the have closed since the credit crunch.
Simon Davies, co-manager of Cheyne's fund, said extreme market conditions over the last few years had caused a "huge retrenchment of capital out of the strategy".
The depletion of players in the market has benefited the survivors, Davies said, as less capital now chases more plentiful trading opportunities in credit markets, and produces better spreads on M&A deals.
A safe M&A trade that may have made 6% to 8% annualised before the crunch might make 8% to 14% now, Davies added.
Managers also point to the tailwind of widespread corporate distress and consolidation they expect in 2014, when about $405bn of US institutional leveraged loans and high-yield bonds mature, compared to just $22bn this year.
European companies face their own wall of maturities estimated at $112bn in 2014 and 2015, compared to $3bn this year.
Omar Kodmani, senior executive officer at fund of funds Permal, said: "Distressed debt has a phenomenal outlook in the coming years. A lot of debt issues will hit trouble and distressed experts will be able to capitalise on the ones going bankrupt or restructuring."
However, PiRho's Irvine cautioned event-driven investing demands patience of pension fund investors. "If investors are offered opportunities to invest in event driven funds that appear liquid, they should avoid them as the liquidity terms are not appropriate."
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