News this week that the world’s largest hedge fund manager, Man Group, is to take full ownership of Ore Hill Partners Capital Management highlights the under-researched area of event-driven hedge funds.
Man, which manages about $69 billion in a wide range of funds and strategies, bought its original 50 per cent of Ore Hill in 2008. After the latest deal is complete, Man will migrate the Ore Hill clients to its discretionary mandate platform and the underlying manager will remain as sub-advisor.
Interest in the deal is not because of its size – Ore Hill has less than $1 billion under management – but because of the specialist strategy it focuses on.
Event-driven strategies look a lot like old-fashioned hedge funds: the managers are very secretive and see themselves as primarily “opportunistic”. The strategies include not only M&A activity, which makes up the core of the investments, but IPOs and various arbitrage and mis-pricing opportunities.
The main investors in event-driven strategies are hedge funds of funds, like Man, but according to research by Preqin, the international alternatives research firm, sovereign wealth funds have recently overtaken banks to become the second-biggest investor category in the event space with about 17 per cent of all sovereign funds being involved.
Interestingly, the investor base for event strategies is 15 per cent each from the US and Asia, 13 per cent from Europe and 9 per cent from the rest of the world, according to Preqin. This is one of the heaviest concentrations of Asian investors in any investment class.
The biggest single funds known to be in the space are APG, New York State Common Fund, K2 Advisors hedge fund of funds manager, the Esmee Fairbairn Foundation and the Duke University endowment plan.
The fact that event-driven managers are able to outperform is testament to the increasing awareness of the inefficiency of markets. The challenge for investors, though, is to decide on an appropriate benchmark.
Event strategies will invariably include a fair amount of equity beta, by their nature, but they will also include some “hedge fund beta”.
Hedge fund beta is one of the names given to simple quant strategies which systematically exploit the way markets tend to behave over the long term.
In the event manager’s case, the main hedge fund beta is a simple strategy of buying the target stock in a takeover and selling the acquirer’s stock. So, investors can build their own index based on such a strategy to use as a good benchmark to assess manager skill.
More often, though, investors use either the broad equity market benchmarks or cash to assess the manager’s track record, neither of which really tell us anything about whether the manager has demonstrated any skill.
According to Preqin, though, the average target returns for event managers is 8.5 per cent a year, which, if achieved, would be an enviable performance in most years.