In recent conversations with investors, research analysts at BHA have noticed an increasing interest in merger-risk arbitrage. This is after the strategy saw its worst years in 2008 and 2009. HedgeFund.net reports, “The strategy had a big year in 2006, gaining 12.93% on the HFN Merger-Risk Arbitrage Index. In 2007, when the Dow Jones Industrial Average peaked at 14,093 and deal volume hit $1.57 trillion, the strategy also performed well, returning 6.42% on the HFN Merger-Risk Arbitrage Index. But in 2008, the strategy tanked hard, losing 2.89% on the HFN Merger-Risk Arbitrage Index during the worst ever annual performance for the asset class, a 15.75% loss on the HFN Hedge Fund Aggregate Index. Deal flow was sluggish, and the global credit crisis tightened deal making.”1

Now that the credit market has seen some loosening, merger-risk arbitrage deals are on the rise again. Although merger-risk arbitrage is correlated to the overall credit market, investors are still attracted to the strategy since it is not affected by the equity market’s ups and downs.

A large wealth advisor based in Brazil with more than $200 million invested in hedge funds is interested in hearing from managers in the event-driven space, more specifically from funds that are focused on merger-risk arbitrage strategies. The firm is looking to place capital into three to six funds and it wants at least a couple of them to be in event-driven merger-risk arbitrage. The firm believes the strategy is going to provide good returns and have low correlation to the market.

After 2008, the merger and acquisition space has seen a tremendous increase in the number of deals being done. As a result, managers running merger-risk arbitrage funds have more deals to trade on and greater opportunities. Investors are realizing the potential that the strategy holds once again.

1 HedgeFund.net, “Merger-Risk Arbitrage Set for 2010 Surge,” March 22, 2010, http://www.hedgefund.net/publicnews/default.aspx?story=11076.

The second half of 2009 proved to be successful for equity markets around the globe. Many investors have expressed satisfaction with their portfolio’s exposure to stocks and are looking to gain access to sectors that offer low correlation to equity markets.

For the first two months of 2010, BHA analysts have seen increased investor interest in the energy and commodity sectors. Approximately 18 percent of investors looking at sector-focused funds cited energy and commodity related strategies. Of these investors, some are researching funds that concentrate on physical and hard commodities, expecting them to have the lowest correlation to equity markets.

A consulting firm based in Switzerland that specializes in energy and commodities sees great opportunity in these sectors. It believes that the current gap between supply and demand will lead to higher prices. The firm also anticipates emerging markets to have abundant energy opportunities since these countries are some of the largest producers in the world.

Another Swiss investor, a large family office, told BHA analysts that it is seeking global macro funds focused on emerging markets, specifically Asia and Russia that have exposure to energy and alternative energy, mining, infrastructure, water, agriculture, raw land, and hard commodities. The firm believes that these types of funds offer low correlation to equity markets.

With the current stability in equity markets, many investors seem to be seeking uncorrelated investments, and funds focused on energy and commodities are at the top of their lists.

Many investors that BHA analysts speak with have set requirements for the amount of assets a potential fund should have under management. As reported in the article above, “Investors Demanding Stability, Sophistication, and Transparency from Fund Managers,” during the month of August, 57 percent of active hedge fund investors indicated a preference for funds with $100 million to $1 billion in assets under management. While these investors represent a cross section of alternative fund investors, analysts have also found that many investors tailor their requirements based on specific searches or mandates they are pursuing at a given time.

Sometimes investors look for smaller funds that are nimble when they want managers that can move in and out of positions relatively easily. Other times, investors turn to larger funds when they want to make a sizeable allocation to a particular strategy but do not want hold a large position in the fund.

An example of an investor taking this case-by-case approach is a wealth advisor based in Switzerland. The firm had previously searched for smaller global macro

managers with assets of less than $100 million. Recently, however, the firm searched for multi-strategy funds with assets in the $300 million to $500 million range.

As BHA analysts speak with investors, it’s apparent that some have no preset requirements for assets under management and are changing their specifications with every mandate. This gives managers of all sizes an opportunity to get in front of investors.

Recently, third-party solicitors for hedge funds and private equity funds have been under scrutiny. The SEC is trying to ban placement agents and third-party marketers from working with state pension funds, and has successfully done so in New York. This is mainly due to the pay-to-play practices that have been used in recent years. Pay-to-play is essentially the payment of money, often through campaign contributions, in return for government business.

While the ban will clean up unfair practices, it also creates a difficult situation for fund managers that have traditionally relied on third-party services to introduce their funds to alternative investors. Identifying alternative investors that are interested in managers’ strategies is a time-consuming and tedious task-a task many managers do not have the time to perform. Even more time consuming is calling on potential investors. Placement agents and third-party marketers perform these functions for fund managers. However, due to scrutiny, state pension funds are shying away from having any contact with third-party solicitors.

The Brighton House Associates (BHA) model is a perfect fit for the current marketing environment. BHA is a neutral third-party firm that does not present investors with funds. Rather, BHA enters into conversations with investors with an unbiased approach. Analysts at BHA speak with investors on a daily basis and discuss their current interests, strategy searches, requirements, and investment mandates. Never during the conversation does BHA mention or introduce a specific fund. The only time an investor will hear from a manager is if their interests align with a manager’s strategy.

The current regulation under consideration is leaving public pension plans with the daunting task of finding the right funds, and managers with the time-consuming task of finding the right investors. Given the situation, it is beneficial for both to use a neutral party.