Event Driven Funds – Green Shoots after a Tough 2022
March 29, 2023
Most Hedge fund managers were rather relieved to see the back of 2022, especially the event driven strategies funds, which despite a brief reprieve in October 2022, largely due to Elon Musk closing the Twitter deal, however, ended the year with a net return of – 5.37%1. On the other side, the new year saw the event driven funds delivering one of the best performances in the industry, clocking an impressive 6.7%2 in a market still beset with high inflationary trends, interest rates continuing to move northwards and a stubborn Fed that simply refuses to tone down its hawkish stance.
The collapse of Silicon Valley Bank, followed by Silvergate and Signature Bank on the back of the Fed’s hawkish stance led to a surge in Bond prices and a consequent sharp decline in the yields has led to many funds reversing their options overnight and trying to stem the bloodbath. While there seems to be some concern about the Fed and a call to moderate its rate hikes, the stoic silence from them is continuing to unnerve the funds which are now looking for safe retreats.
The immediate fallout of the above events was the performance of Bank stocks and funds trying to offload booking a negative return and the fall of Credit Suisse only exacerbated the problem.
The issue that is being faced by most fund managers of the Event driven funds is lack of clarity related to the Fed and the resultant impact on concomitant factors. According to a report by Morgan Stanley, the following three sectors could see significant levels of dealmaking in 2023, creating opportunities for the event driven funds:
- Healthcare, due to expiring patents of Pharma companies could lead to a hunt for biotech acquisitions, especially as most of the Pharma players have no dearth of liquidity in a post-covid economy.
- Technology: According to the report, there are publicly traded companies which are contemplating a return to private company status which would provide opportunities for the event fund managers
- Energy: With treasuries awash in liquidity due to incessant price rise in 2022, fueled by the Ukraine crisis and a return to fossil fuel with a heightened interest in medium term alternative energy, this sector again could again see an increased momentum in M&A transactions in 2023.
Current indications3 are that in a market with increased volatility, indications of low-intensity but long tail recession in the US, sticky inflation in Europe, event driven funds have been forecast to have the highest forecasted returns in 2023.
The first half of 2023 is likely to continue to be choppy and the same is already being exemplified by the rout in the banking stocks and uncertainty in the global macros. However, with interest rate hikes likely to abate by the end of H1, 2023, there is every likelihood of new actionable opportunities to invest.
Any forecast of event driven funds strategies needs to keep in mind that the performance of these funds is essentially predicated on three major drivers:
- Presence of an Activist on their focus on a specific sector/ enterprise. Think of Pershing, Elliot, Icahn et al. Pershing’s Ackman has already predicted that the US is heading for a ‘train wreck’4, after the Fed increased the interest rates by a quarter percentage to 5% earlier this week. However, there does not seem to be any activity with respect to any one sector or company.
- Distressed assets: Again, with high volatility, while there is stress on a few sectors, besides banking, there does not seem to be any major distressed sectors or assets.
- M&A deals: As discussed above, it is expected that a more settled H1 will lead to a surge in the M&A deals.