(Repeating story first sent on Thursday without changes to
text)
By Lawrence Delevingne
NEW YORK, Dec 24 (Reuters) - This year, betting on corporate
takeovers and restructurings should have been a sure thing for
investors as the value of deals soared to record levels. It
didn't work out that way.
Hedge funds that look to profit when companies are acquired
or do other major corporate maneuvers dropped an average of 2.29
percent this year through November, making them the only major
investing style to lose money, according to HedgeFund
Intelligence. The S&P 500 Index rose 4.78 percent over the same
period, including dividend payments.
"It turned out to be a very challenging year," said Tristan
Thomas, who helps clients select hedge funds at Northern Trust (O:NTRS)'s
50 South Capital. "A few crowded stocks hurt a large number of
the brand name funds."
The poor showing by managers of funds that focus on mergers
and other corporate events, known as "event-driven funds," gives
further ammunition to critics of the industry, who complain that
hedge funds charge high fees for mediocre returns.
It isn't just this year that has been bad for the funds.
Their longer-term average annual returns are even worse. Since
January 2010, event driven hedge funds gained an annual average
of 4.43 percent versus 13.3 percent for the S&P 500; since
January 2005, the funds gained an annual average 5.53 percent
versus a 7.5 percent return for the benchmark stock market
index.
Among the big losers were some of the biggest names in the
hedge fund world, such as Bill Ackman's Pershing Square (N:SQ) Holdings
(down 22 percent through December 15); Richard Perry's Perry
International (down about 9.7 percent through November); Mick
McGuire's Marcato International (down about 9 percent through
December 15); and James Dinan's York Capital Management LP (down
12 percent through November), according to performance
information reviewed by Reuters.
The funds make big bets on relatively few companies, because
of the intense amount of research involved. The big problem was
that many of the stocks that were widely held by event-driven
funds turned out be clunkers this year, including drug company
Valeant Pharmaceuticals (N:VRX), VRX.TO which plunged more than 55
percent after short-sellers and lawmakers raised questions about
its accounting, pricing practices, and the tactics it used to
get insurers to pay for certain drugs.
Another popular bet for event-driven funds was Yahoo Inc ,
YHOO.O whose shares have fallen by about a third this year
after the company scrapped its efforts to spin off its stake in
Chinese e-commerce giant Alibaba (N:BABA) Group Holding Ltd, BABA.N
because of concerns that shareholders would face a huge tax
bill.
Combined with Valeant and Yahoo, popular event-driven names
Williams Companies (N:WMB) WMB.N and Qualcomm QCOM.O represent four
of the 20 worst hedge fund stock bets of the year by dollar
amount, according to public disclosures of Sept. 30 holdings
analyzed by research firm Novus.
Shares of energy company Williams have fallen by 57 percent
over the past six months after the company rejected a takeover
bid by Energy Transfer Equity in June, but accepted a much lower
bid from the same suitor in September. And technology company
Qualcomm decided earlier this month, after a review, that
splitting into two didn't make sense. That and other business
concerns have pushed its stock down more than a third this year.
SURE BET
At the beginning of the year, betting on mergers seemed to
make good sense.
In January, Robert Duggan, a portfolio manager who invests
in hedge funds on behalf of clients at SkyBridge Capital, noted
that there was a "significant opportunity" for event-driven
funds thanks to the large number of deals in the works, and the
relatively high levels of cash on companies' balance sheets to
either pay out to investors or use for acquisitions.
Managers that take advantage of mergers and acquisitions and
other company moves were $13 billion SkyBridge's top strategy
pick. It bet big on hedge funds run by ultra-wealthy investors
John Paulson, Dan Loeb and Barry Rosenstein, among others,
according to a public filing at the time.
SkyBridge was right on deal making: with only 7 days left in
the year the value of M&A deals globally has risen nearly 41
percent from 2014 to a record $4.6 trillion, according to
preliminary Thomson Reuters data. But picking the right events
turned out to be tough.
SkyBridge is down more than 4 percent in 2015 through
November in its Series G fund of hedge funds, according to a
public filing. Event-driven hedge funds run by Paulson's Paulson
& Co., Loeb's Third Point and Rosenstein's JANA Partners are
down for the year. Swiss fund of funds Altin is up 1.4 percent
through December 21, but its performance was held down by a
nearly 30 percent allocation to event-driven managers, including
losing funds like Jana Nirvana and Paulson Enhanced, according
to marketing materials.
A group of mutual funds that allocate to hedge funds -
so-called liquid alternatives - have lost money this year thanks
in some part to event-driven managers in their portfolios. They
include, according to public disclosures, the Goldman Sachs (N:GS)
Multi-Manager Alternatives Fund, Neuberger Berman Absolute
Return Multi Manager Fund, Hatteras Alpha Hedged Strategies Fund
and Arden Alternative Strategies Fund.
Michaël Malquarti, an Altin portfolio manager, said that it
seeks to reduce the risk of suffering big losses from hedge
funds that have concentrated bets on corporate events by
avoiding allocating too much of their portfolios to those funds.
Others declined to comment or did not respond to requests.
STILL BULLISH
It's not all gloom.
Some were able to make money with the right bets. The $600
million Polygon European Equity Opportunity Fund, managed by
Reade Griffith, and the $1.7 billion HG Vora Special
Opportunities Fund, led by Parag Vora, are both up more than 6
percent through November, according to a person familiar with
the situation. And the nearly $620 million Tosca Opportunity
fund, led by Martin Hughes, is up about 10 percent for 2015
through November, according to performance information seen by
Reuters.
The funds appear to have gained by mostly avoiding the
popular U.S. stock bets that hurt others and instead focusing on
smaller companies, including those in Europe and Asia.
The sector is also far from contracting despite the
setbacks. Some 56 event driven hedge funds launched over the
first three quarters of 2015, according to data tracker Hedge
Fund Research, compared with 45 liquidations.
There has also been nearly $11 billion in net investment
added to all event-driven funds over first three quarters of
2015, according to HFR, and assets in the strategy sit near
record highs at $745 billion.
Pensions and other institutional investors continue to
increase their hedge fund allocations, even as the California
Public Employees' Retirement System, one of the largest pension
group's in the world, cut most of its hedge fund managers last
year, citing "complexity, cost and the lack of ability to
scale." The pension did retain its portfolio with activist
investors, who agitate for change by attempting to gain board
seats, win shareholder votes and more.
And many investors in hedge funds remain bullish on the
strategy. Goldman Sachs Asset Management, Neuberger Berman,
Franklin Templeton Investments' K2 Advisors, Citi Private Bank
and Pacific Alternative Asset Management Company all have a
positive outlook for event-driven managers going into 2016.
"We remain cautiously optimistic," said Putri Pascualy, a
managing director at PAAMCO. "Security selection will be
paramount in identifying events that are still viable despite
recent market volatility."