While signs that hedge funds, like the wider equity markets, had a torrid time in 2018, latest data shows how bad a year it was for the asset class.
According to data from Preqin, following December’s 2.27 percent loss in the firm’s All Strategies Index, it brought total losses for the year to 3.42 percent, the first negative year since 2011.
Hedge funds focused on the Asia-Pacific region ended 2018 with their lowest annual return since 2008.
However, according to info from asset manager Lyxor, the market has rebounded positively for risk assets since December for a number of reasons. These include a softer monetary policy stance from the Federal Reserve, which Lyxor predict will be confirmed at the next FOMC meeting on 29 January.
Lyxor also believes that an easing of US-Sino trade tensions has aided risk assets although concedes that caution should prevail in the medium term as recession risk in the UK and Europe have risen and Brexit uncertainty remains high.
In terms of hedge fund strategies, Lyxor favours merger arbitrage and fixed income arbitrage as they have demonstrated their ability to navigate difficult markets in the past. The former is available in a liquid UCITS format from Schroders, which has a fund called GAIA Paulson Merger Arbitrage following the same strategy as hedge fund boss John Paulson’s merger arbitrage fund but with UCITS protection.
The Paris-based asset manager is backing merger arbitrage as M&A activity has started 2019 with a “bang” to use Lyxor’s phrase. An example is the announcement that Bristol-Myers Squibb is planning to acquire Celgene for $71 billion suggests that healthcare M&A deals will continue unabated although it wasn’t too long ago that Valiant caused major losses among hedge fund dons. The recent $57 billion Takeda takeover of Shire illustrates that this is a sector ripe for further consolidation.
Lyxor argues that merger arbitrage is a defensive strategy with low market beta and long allocations to quality and low beta stocks (or lower volatility).
Recent adverse market movements and new deals announced has led to a widening of spreads, obviously if the deal goes well the fund benefits from the widening of the gap or spread. However, at seven percent, Lyxor said that current levels should be seen as an attractive entry point to the strategy as opposed to a structural factor supporting it.
For those still interested in pursuing hedge fund strategies, merger arb seems to be where the smart money is although after last year’s shock performance the asset class has a long way to come back from.
