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Event-driven hedge funds take advantage of strong M&A environment
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Some equity hedge fund managers struggle in benign stock markets
LONDON--(BUSINESS WIRE)--
The gap between the best and worst performing hedge funds has narrowed
during the first half of 2014, BlackRock’s latest analysis of the hedge
fund industry has found.
Hedge fund managers’ performance varied widely in 2013, but 2014 has
seen the spread narrow between the top and bottom managers. Top decile
hedge funds returned 11 per cent, compared to losses of -5 per cent for
bottom decile hedge funds, narrowing the range from the previous year.
In 2013, the inter-decile range was between 15.5 per cent to -6.5 per
cent. Alpha, or the component of these returns attributable to manager
skill, varied significantly between strategies, in some cases,
representing almost 60 per cent of average total returns.
David Barenborg, head of hedge fund manager research at BlackRock
Alternative Advisors, said, “The total return profile across hedge fund
strategies is different from this time last year, but the data confirms
the key issue for investors in hedge funds remains identifying managers
with the most skill.”
M&A boon for some
Funds that were able to profit from idiosyncratic risk drivers, rather
than market beta, performed well in the first half of 2014, with
‘relative value’ and ‘event-driven’ managers demonstrating the highest
alpha on average across hedge fund strategies.
Event-driven hedge funds, which aim to exploit pricing inefficiencies
around corporate events, took advantage of the highest level of global
M&A activity since 2007 to deliver an average alpha of 2.5 per cent on
total index returns of 4.3 per cent, meaning over half of the fund’s
returns were attributable to manager skill.
Barenborg added, “The M&A environment has proven to be fertile hunting
ground for event-driven hedge funds, and many managers have delivered on
their alpha promise. Similarly, we have also seen strategies focused on
distressed investing benefit from pockets of distress in some emerging
markets, as well as an increase in high yield and leverage loan defaults
in the second quarter.”
Challenging market for equity hedge funds
In contrast, 2014 has so far proven a more challenging environment for
alpha generation among equity hedge managers, which aim to profit from
long and short positions in stock markets.
While average total returns here delivered 2.6 per cent in the first six
months, average alpha was negative at -0.8 per cent, and this style also
demonstrated a wide dispersion between the best and worst managers,
BlackRock’s research found. The best equity hedge managers (top decile)
have continued to deliver both high alpha and total returns of 7.6 per
cent and 12 per cent respectively.
“Many average and below-average equity hedge funds performed well on a
total returns basis in 2013, but in many cases, this was driven by the
beta in their portfolios, rather than manager skill, or alpha. This has
been made more evident in the less bullish equity environment we have
seen this year,” Barenborg said.
BlackRock’s research and outlook
BlackRock’s research examined the H1 2014 returns of 1,549 hedge fund
managers in the Hedge Fund Research, Inc database, separating returns
into three categories – ‘traditional beta’ such as general market
returns, ‘non-traditional beta’ such as equity sector spreads, and
‘alpha’ – the component of the returns that was unexplained and
therefore attributable to manager skill.
Barenborg stated, “This research demonstrates the importance of
thoughtful manager selection within any given strategy. Looking ahead,
continued policy uncertainty, volatility and potential market
mispricings will continue to provide opportunities for event-driven and
relative value hedge funds in particular. That said, over the long-term
a diversified exposure to multiple hedge fund strategies, with a
selection model which focuses on each manager’s ability to generate
alpha consistently rather than short-term historical total returns, will
provide the best outcomes for investors.”
BlackRock manages $34.3 billion in 30 single strategy, multi-strategy
and hedge fund solutions, and the firm is a pre-eminent provider of
alternative investment solutions globally, with over $115 billion in
assets as of June 2014.
About BlackRock
BlackRock is a leader in investment management, risk management and
advisory services for institutional and retail clients worldwide. At
June 30, 2014, BlackRock’s AUM was $4.594 trillion. BlackRock helps
clients meet their goals and overcome challenges with a range of
products that include separate accounts, mutual funds, iShares®
(exchange-traded funds), and other pooled investment vehicles. BlackRock
also offers risk management, advisory and enterprise investment system
services to a broad base of institutional investors through BlackRock
Solutions®. Headquartered in New York City, as of June
30, 2014, the firm had approximately 11,600 employees in more than 30
countries and a major presence in key global markets, including North
and South America, Europe, Asia, Australia and the Middle East and
Africa. For additional information, please visit the Company’s website
at www.blackrock.com.
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Past performance is not a guide to future performance. The value of
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or
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Source: BlackRock