Investors Target Event-Driven Funds
During the past 90 years, whenever the DJIA 12-month rate of change exceeded 40 percent, market turmoil usually lay ahead. On eleven of the 13 occasions, significant market corrections followed.1 For the period from March 2009 to March 2010, the rate of change once again reached above 40 percent. If the trend stays true, investors may be about to see another correction. Although such markets can be painful, they can also be an opportunity for event-driven funds.
Event-driven investment managers typically look to capitalize on corporate activities or transactions, such as mergers and acquisitions, restructurings, reorganizations, spin-offs, asset sales, liquidations, and bankruptcies.2 Although some transactions, such as M&A, tend to be products of good markets, many others occur in bad or unpredictable markets.
The risks for corporate transactions are many: they can take longer to negotiate than anticipated; they can be negatively affected by changes in the market; and they may have to win regulatory approval, just to name a few. Sometimes a given transaction is altogether abandoned. Still, current investor appetite for event-driven funds is strong.
In the month of March, the BHA research team spoke with more than 186 investors from all investor categories. Twenty-five percent showed an interest in event-driven funds. This level of interest in event-driven funds has held fairly steady since the first of the year. For example, a large university endowment in the Northeast mentioned a keen interest in the event-driven space. The endowment prefers funds that manage a single pool of capital and pursue a coherent investment philosophy.
It is unclear if investors are expecting turmoil in the market. Some may be chasing returns—event-driven funds’ performance has improved—while others may be taking advantage of the large number and variety of opportunities currently available. Whatever the reason, investors allocating to these funds now should find themselves well-positioned for the future. And if history repeats itself, more opportunities will be on the way.
1 Business Insider, “90 Years of History Suggests A Move Like This One Is Followed By A Market Bust,” March 31, 2010.
2 Investopedia.com, “Hedge Funds Hunt For Upside, Regardless of the Market.”