Why event-driven and multi-billion dollar hedge funds attract the most inflows



Record mergers and acquisitions (M&A) numbers in the first five months of the year resulted in event driven hedge funds outperforming. Meanwhile, new data shows that the major hedge funds are growing the fastest despite the typical outperformance of their smaller competitors, while hedge fund performance has improved across the board.

Event-driven managers outperform other strategies

The HFM Event-Driven Composite Index gained 11.9% in the first five months of the year, after 1.6% in May. In a recent report, HFM said record levels of M&A activity in the first five months of the year contributed to the performance gains. This year saw several big deals, such as the merger of WarnerMedia with Discovery Inc, some activist campaigns and the constant development of SPAC arbitrage strategies.

Linsey Lebowitz Hughes of Duke University’s Department of Economics pointed out another reason event-driven managers have outperformed this year. She found that macro-driven strategies perform best during times of volatility, often due to discretionary positioning and high leverage. She believes that event-driven managers do well in volatile times because they are so well informed.

“In my opinion, macro managers are some of the best-informed managers in the world, which is an ideal partner to go into a period of expected inflation,” Lebowitz said in an email to Hughes. “They are very adept at assessing the interplay between asset classes, they have a deep understanding of the global financial markets and have a very keen sense of geopolitical factors.”

She also believes that savvy investors understand how well-informed event-driven managers are, and are therefore “eager to fill their macro investment bucket with many smart global macro managers who just ‘get’ it and are in are appropriately positioned for the next phase “. Chapter.”

Increased investor interest in event-driven funds

Additionally, investors were drawn to event-driven funds with inflows of $ 5.6 billion, bringing the niche’s inflows to $ 2.1 billion year-to-date.

Lebowitz Hughes named three factors that drove interest in event-driven funds this year. They’re the chase for returns that she described as “always a popular sport in RF investing,” an increase in pent-up M&A activity after COVID, and a rebound from 2020 that wasn’t a great performance year for event managers.

“It’s like a miniature version of what happened to the executives at Convertible Arbitrage from 2008 (a dismal year) to 2009 (they kicked it out of the park),” said Lebowitz Hughes. “The range of options is plentiful and event managers are keen to raise capital so they have dry powder for this cycle.”

Event-driven funds fared much worse than other strategies in the first few months of COVID-19, according to HFM data. The strategy saw significant cash outflows over the past year but performed well towards the end of the year.

Larger fund managers attract more cash inflows

In addition to event-driven fund strategies, HFM recently looked at inflows into massive funds that are part of its “billion dollar club”. During last year’s pandemic, the global hedge fund industry made a comeback that took the HFM billion dollar club’s assets to record highs.

The release said companies managing more than $ 1 billion fell 5% to $ 2.57 trillion in the first half of last year, but grew 10% in the second half Recovered $ 2.83 trillion. In 12 months, the Billion Dollar Club’s net worth grew 5%, including 22 companies. Billion funds now manage two thirds more assets than they did ten years ago.

Global hedge funds grew in the 2nd half of 2020

Global hedge funds rose 12.1% on average over the past year after widespread losses recovered in the first quarter as the pandemic spread, triggering unprecedented lockdowns and the fastest bear market ever recorded. Global net wealth flows were negative in 2020 and did not contribute to the increase in the trillion dollar club numbers.

HFM said inflows started returning in the second half of 2020 and have increased this year. Global allotments have exceeded withdrawals by approximately $ 67 billion. The company added that trillion dollar club funds, managing over $ 10 billion, saw the strongest growth in the second half of 2020 amid solid earnings and as investors preferred the “perceived security of larger companies.” .

Total assets of funds with assets greater than $ 10 billion rose 13% to $ 1.45 trillion in the second half of last year, while those with assets of $ 5 billion to $ 10 billion rose 12 % increased. Funds with $ 3 billion and $ 5 billion in assets were unchanged, while funds with $ 1 billion to $ 3 billion grew 5%. However, the smallest hedge funds posted fortunes in both halves of the past year.

Pension funds are driving growth in larger funds

Lebowitz Hughes gives a few more reasons, and more data shows that larger hedge fund managers grow the fastest and receive a disproportionate share of the inflows. She said that pension funds are responsible for much of the excessive growth, adding that pension funds are most heavily invested in hedge funds and only invest a small portion of their investable capital in them.

“As Annuities become more familiar with HFs and their HF portfolios gradually grow, their approach is cautious and risk averse,” says Lebowitz Hughes. “Therefore, taller, more experienced managers with a long track record and consistent performance are the most attractive partners for retirement planning.”

She added that many pension funds have tested the larger managers and found them reliable as they carefully manage troubled markets.

“While newer, smaller managers can outperform some of these mega-managers, many do not have the long history and institutional structure that large pension funds need to be comfortable,” said Lebowitz Hughes. “Pension funds also tend to be longer-term investors. They want to be slow and steady; they don’t want to be exposed to the dangerous AUM swings that smaller managers can often experience when shorter-term investors repay.”


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