A ‘bloody awful time’ for event-driven hedge funds

Hedge funds aiming to profit from activism and corporate events have been hit hard this month as a raft of deals fell through and markets plummeted, writes the FT’s hedge fund correspondent, James Mackintosh.

The so-called event-driven sector, which includes many of the best-known activist hedge funds, is bearing the brunt of a downturn in hedge fund performance during November, the worst for the industry since the credit squeeze hit home in August.

According to investors, several funds turned in double-digit drops in the first three weeks of this month, hurt by losses as private equity groups walked away from agreed takeovers and by the renewed impact of concern over credit.

Chicago-based Hedge Fund Research’s daily HFRX index calculates the event-driven sector is down 4.3 per cent so far this month, with only long-short equity traders – who tend to be highly exposed to the market – producing a worse performance. By September the main stock markets had turned in their worst performances since the bear market of 2001-2002.

“It is bloody awful,” said one prime broker. “The dispersion between the best and the worst this month is something we have never seen before.”

Among prominent fallers, according to investors, are JPMorgan-owned Highbridge’s $750m Event Driven fund, down 12.7 per cent in the first two weeks of this month; two funds from New York-based Atticus; London’s Tisbury Capital; and New York’s Kinetic Partners.

However, some of the managers, such as Atticus, remain strongly ahead for the year, notes Mackintosh. Highbridge’s $1bn long-short equity fund has risen 4 per cent this month and is up 34 per cent for the year.

“Even the best event-driven managers can’t do well in these conditions,” said an executive at one big fund of hedge funds.

François Barthelemy, manager of F&C Partners’ listed fund of event-driven hedge funds, said the sector had suffered as falling markets hurt the value stocks that are their favourites. But he noted that the outlook for the sector was strong as managers would switch from looking for potential private equity bid targets to finding value in troubled companies.

According to one US hedge fund manager, 15 US deals have fallen through or been subject to renegotiation this month, hurting the traditional merger-arbitrage side of the business. Still, the drop this month is far less serious than the problems in August, when deal spreads – reflecting the risk taken by merger arbitrage – ballooned, notes Mackintosh.