Event-Driven Hedge Funds Are The `Worst Disappointment,' Says K2

  • Global macro funds also fell short amid low interest rates
  • K2 has cut amount of allocations to event-driven hedge funds

Event-driven strategies have been the most disappointing performers this year, said Robert Christian, head of investment research at Franklin Resources Inc.’s K2 Advisors, after many hedge funds failed to profit from mergers and acquisitions despite a record year for deals.

Funds have crowded into the largest corporate deals and have been reluctant to bet on smaller ones, said Christian, whose unit allocates capital to hedge funds and oversaw $10.5 billion of assets at the end of September. That contributed to low returns for event-driven hedge funds in a year that has seen a record number and value of deals such as mergers and acquisitions, he added. Global macro funds have also fallen short of expectations, he said.

Event-driven hedge funds that seek to profit from corporate activities such as mergers, acquisitions and reorganizations lost on average 1.4 percent this year, according to an index compiled by Chicago-based Hedge Fund Research Inc. Allen & Co. announced in September that it was shuttering the merger arbitrage strategy that it had offered clients since 1975, in part because of poor returns for such funds. Hutchin Hill Capital closed a portfolio managed by Steven Mermelstein that made wagers on corporate events.

"The worst disappointment relative to our expectation at the start of the year and throughout the year would have been event,” Christian said. “You have all the matrices that tell you it should have been a great year for event-driven.”

Lower Volatility

Hedge fund returns overall have fallen short of expectations in 2015 as low interest rates have artificially dampened market volatility and suppressed the range of returns for different assets, known as dispersion, he said. While price swings spiked in August amid a global market selloff, the Chicago Board Options Exchange Volatility Index, or VIX, stayed close to its five-year average.

The HFRI Fund-Weighted Composite Index tracking all hedge fund strategies was flat in the first 10 months of 2015, on track for the worst annual industry performance since 2011. About 67 percent of investors in a Deutsche Bank AG annual survey released in March anticipated the gauge to rise between 5 percent and 10 percent this year.

The HFRI Macro (Total) Index, which tracks funds that seek to capture macro trends in the stock, fixed-income, currency and commodity markets lost 1.5 percent this year. Such funds have also been hurt by sustained low interest rates and a shortage of big profitable trends apart from the selloff of emerging-market currencies, Christian said.

"There is definitely a very high correlation between the level of interest rates and the amount of alpha that managers can produce," said Christian.

K2 has pared allocations to event-driven funds since May, Christian said. It started the year with an overweight allocations to macro hedge funds, scaling it back between May and August, and is boosting it again in anticipation of interest rates will rise. A rate hike will increase asset price volatility, leading to outperformance for funds betting on rising and falling stocks in the U.S. as well as those focused on emerging markets, he said.

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