Hedge Fund Investors Sign Up For Event Driven Funds

March 19, 2014

With the S&P 500 and Dow Jones Industrial indices at record highs, noticeable gains from the current levels may be hard to come by. This perhaps explains the strong demand among hedge fund investors for event driven funds which generally do not correlate with the widely followed mainstream indices. Data from eVestment LLC shows that in the month of January investors poured in $5.7 billion into event driven hedge funds, the highest monthly figure in three years. Activist hedge funds took in $3 billion of that money on investor hopes that the current environment is ripe for corporate restructuring. By comparison, event driven hedge funds attracted roughly $30 billion last year.

Event Driven Strategies

Typically when the fundamentals of an economy is strong and expected to improve investors target companies that have dominant position in the market on anticipation that increased consumer demand would lead to sales and profit growth.

But the confidence of investors took a severe beating following the collapse of Lehman in 2008. Despite the stock markets recovering their losses and hitting new highs, many believe that business fundamentals do not justify the strong move. And as such, expectations for further gains are modest. Event driven hedge funds are currently benefiting from this investment climate since its returns are less market driven.

Hedge funds employing event driven strategies invest in companies in which a significant corporate event such as spin off, recapitalization, asset sales, management change, or litigation has occurred or is expected. Data from Hedge Fund Research Inc shows that last year event driven hedge funds gained 12 percent compared with an average gain of 9.2 percent for all hedge funds.

Emerging Markets Not In Demand

A Credit Suisse survey of about 500 investment firms including pension funds, endowments, family offices and funds of hedge funds confirms that there is increased appetite for hedge funds employing event driven strategies.

Robert Leonard, global head of capital services at Credit Suisse says none of the respondents to the survey plan to lower allocations to event driven strategies this year.

The survey also found sharp decrease in investor interest for emerging markets focused hedge funds. Investor net demand for emerging market strategies was just 10 percent compared to 42 percent in last year’s survey.

Other strategies finding favor among hedge fund investors according to the survey are long short equity strategies which bet on both rising and falling stocks, and global macro strategies which are trend based investments on stocks, bonds, currencies and other instruments.

Job Market Impact

The shift in investor preference away from emerging market focused funds reflects the investor perception that there is greater level of certainty in developed markets in the near term.  At the same time preference for event driven funds suggest that most investors do not expect a significant rise in major stock market indices from current levels. While higher level of certainty would be modestly positive to the job market, muted expectations for meaningful increase in stocks from current levels indicates the lack of confidence in the pace of economic recovery suggesting that hiring may not pick up steam any time soon.

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