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Last updated 3 hours ago
Mar 13 2012 | 8:39am ET
By Anne-Gaelle Pouille, Associate Director, Pacific Alternative Asset Management Company -- 2011 was a disappointing year for many event-driven hedge funds, as illustrated by the Dow Jones Credit Suisse Event-Driven Hedge Fund Index and the HFRI Event-Driven Index (-9.1% and -3.0%, respectively). Yet despite frustrating recent performance, the longer-term track record of the strategy remains compelling (over a ten year time period, from 2002—2011, the Dow Jones Credit Suisse Event-Driven Hedge Fund Index ranks as the third top performing strategy of the ten strategies ranked in the index). So has something fundamentally changed the attractiveness of the event-driven strategy or is this a “poor run” that will revert? Is the event-driven alpha engine broken or just in need of a tweak?
Event-Driven Environment in 2011 and Outlook for 2012
In 2011, event-driven faced a “Bermuda Triangle” of external factors:
For 2012, we believe the third factor—the low level of the risk-free rate—is very likely to persist. However, the first two factors may be less important drivers this year. We are already seeing a pick-up in dispersion indicating higher expected rewards from security selection. In addition, volatility across markets has declined. While we remain uncertain about the specifics of the macro outlook, recent events do point toward at least a softening of macro-driven risk reversals. In brief, the environment in which event-driven hedge funds operate seems to be improving into 2012. Let’s now turn to the pipeline of event trades.
There is a well-documented, structural bull case for the event-driven strategy based on the continued existence of functioning capital markets and on the strategic imperatives companies around the world face to engage in corporate actions. Currently, many of these companies are sitting on high cash levels. Below are a number of the more prominent themes PAAMCO sees for 2012.
Implementation Considerations—Suggested Tweaks to Keep the Alpha Engine Running
From where we stand today there are considerable potential return-generating opportunities in event-driven for 2012. This would indicate that the key challenge for investors for 2012 is not the event-driven opportunity set, but rather adequate downside risk management and appropriate investment structuring. With this in mind, we believe that event-driven managers in institutional portfolios should preferably be:
Anne-Gaelle Pouille, CFA, CQF is a Portfolio Manager responsible for hedge fund selection and portfolio construction in PAAMCO’s Event-Driven strategies. She is also the Portfolio Manager for the firm’s Pacific Corporate Opportunities (U.S. Dollar), Ltd. commingled fund. Anne-Gaelle received her MBA from Harvard Business School, her MS (Distinction) from the London School of Economics, and her BS (First Class) from Imperial College London.