Event driven deep dive – 2021

Event driven is the third smallest strategy monitored by Aurum’s Hedge Fund Data Engine by number of funds, consisting of 195 funds out of the ~ 3,500 funds monitored. It was the second strongest performing master strategy in the 12 months to February 2021 (outperformed only by equity L/S). All event driven sub- strategies delivered positive performance over the review period, although there was wide dispersion between the top and bottom performing sub-strategies. All event driven sub-strategies experienced investor outflows during the period too, but in all cases this was more than offset by AUM growth generated through positive performance.

As a strategy, event driven has attracted a lot of media attention over the past 12 months; a material driver of this has been a significant shift of many event driven funds towards allocating to SPACs (special purpose acquisition companies). SPACs raise capital from investors through a public listing and then use the proceeds with the express purpose of taking a private company public. The significant asset price dislocations and volatility of last March created a lucrative opportunity set for hedge funds, with many SPACs trading at or below their ‘trust value’. In addition to this, there has not only been the tailwind of a huge supply of SPAC capital to the market, but this has been accompanied by enormous investor appetite, including that of insatiable retail investors. So far in just the first two months of 2021, 235 SPAC vehicles have raised US$72bn, approaching the record-breaking 244 SPACs raising US$78bn for the whole of 2020^[1], indicating that 2021 will be another record-busting year of capital raising for SPACs. The SPAC market is being seen as a convenient way for private companies to access public capital markets, without the additional burdens associated with a traditional IPO.

Activist was both the strongest performing event driven sub-strategy and the strongest sub-strategy of all those monitored by Aurum’s Hedge Fund Data Engine, generating an average return of 41.8%. It also had the widest performance dispersion (10th-90th percentile 2.0% to 81.4%) and the highest volatility of the event driven sub-strategies – which is not unexpected for a strategy defined by the variety in managers’ specific trades. Activist funds have typically exhibited high beta to equities, and the strong rebound in global equity markets after March 2020 will have benefited funds within the sub-strategy. While there were minor outflows, the strong positive performance resulted in sub- strategy AUM growth in aggregate.

Opportunistic is the second largest sub-strategy by AUM; it was also the second strongest performing sub-strategy of event driven, generating an average return of 20.1%. Opportunistic managers also had the second-widest dispersion (10th-90th percentile -4.1% to 45.5%) and the second highest volatility of the event driven sub-strategies, and suffered the second-worst drawdown in March 2020. However, the sub-strategy experienced the largest investor outflows across event driven and saw the second smallest net AUM growth.

Merger arbitrage generated an average return of 13.0%. It is the smallest event driven sub-strategy by assets, and had the tightest performance dispersion (10th-90th percentile -4.8% to 37.7%) over the period, as well as the lowest observed net AUM growth, totalling just $1.64bn. The largest merger arbitrage funds outperformed their smaller counterparts. Merger arbitrage funds, which have less systemic risk than other event driven sub-strategies, weren’t hit as badly as opportunistic/activist funds in March 2020. M&A activity dried up in the uncertainty that followed Q1 2020. New deal flow was practically non-existent until H2 2020, before rebounding strongly with more than $2.3tn^[2] of deals announced in the second half of the year. Q3 and Q4 2020 also marked only the second time since 2008 where deal flow exceeded $1trn^[2] in consecutive quarters. The momentum continued into the start of 2021, with a number of acquisitions targets seeing multiple counterbids and price bumps. A high degree of deal breaks were anticipated after March, however very few deals actually failed.

Multi-strategy is the largest event driven sub-strategy by AUM, yet it delivered the weakest performance, up 11.4% in the 12 months to February 2021. However, it had the lowest standard deviation, the smallest drawdown in March 2020 (-5.4%), and the second tightest performance dispersion (10th-90th percentile -3.9% to 43.3%), which is to be expected from funds with diversified underlying strategies.

Overall, funds within the observed event driven strategy generated US$36.3bn net of fees to the benefit of investors over the past 12 months, in an exceptionally strong period for the strategy.

NET RETURN OF MASTER & SUB-STRATEGIES

All figures and charts use asset weighted returns unless otherwise stated. All data is sourced from Aurum Hedge Fund Data Engine.
* Aurum Hedge Fund Data Engine Asset-Weighted Composite Index.