Hedge funds betting on takeovers and company re-organizations are once again attracting investment in Europe amid the continent’s best start to a year for deal-making since 2014.
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 have reduced the risk of mergers and acquisitions falling apart. Their resurgence is part of a fight-back for 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.”
Event-driven funds handed investors a return of about 10 percent last year, more than twice the gain in the industry as a whole, plus another 4 percent in the first five months of 2017, data from Hedge Fund Research Inc. show.
While the strategy continued to make money by betting on company re-organizations and share repurchases, investors were put off in recent years by the collapse of several high-profile mergers and acquisitions.
Deals worth $3.6 trillion were terminated or withdrawn from 2014 through 2016, including Pfizer Inc.’s attempted $160 billion merger with Allergan Plc last year. Billionaire John Paulson’s event-driven hedge fund posted a 14 percent loss following the collapse of Shire Plc’s tie-up with fellow drugmaker AbbVie Inc. in 2014.
“Previous years had been difficult because of some significant deal breaks,” said Karim Leguel, a managing director at JPMorgan Alternative Asset Management Inc., which invests $13 billion in hedge funds.
The tide is now beginning to turn, with pulled M&A transactions falling by almost half this year compared with the same period of 2016, according to data compiled by Bloomberg.
This is luring investors back.
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.
The picture for the industry outside of Europe is less rosy, though still improving. Outflows from event-driven funds globally are slowing, with investors pulling almost $4 billion in the first four months of 2017, compared with about $60 billion over 2015 and 2016, eVestment data show.
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, with transactions including Johnson & Johnson’s takeover of Swiss drugmaker Actelion Ltd., data compiled by Bloomberg show.
Elsewhere in the world, deal-making continues to struggle, with optimism waning that President Donald Trump will implement reforms that will spur M&A.
Deals worth $1.5 trillion have been announced globally this year, about 4 percent less than in the same period of 2016. In the U.S., volumes are down nearly 11 percent to $751 billion, after two strong years when companies spent trillions of dollars on acquisitions, spinoffs and joint ventures.
That past activity in the U.S. is another boost for deal-making in Europe as companies seek to catch up with their peers across the Atlantic.
“Europe has a lot of catch-up to do,” said Michel Massoud, founder of London-based Melqart. “Corporates are doing better, earnings are growing, with analysts’ revisions trending up.”