GogglesPisano
Pawn, in game of life
- Joined
- Oct 20, 2003
- Posts
- 3,939
Events conspire to make activists think again
By James Mackintosh
The Financial Times (London)
February 4, 2008
Activist hedge funds have been favourite hate figures for years, with trade unions, corporate bosses and
continental European politicians all criticising confront-ational attacks on underperforming companies.
Now their biggest group of supporters is also growing uneasy. Hedge fund investors, who piled $31bn into
activists and other event-driven funds last year in the hope of fat profits, worry the sector will be hurt this
year by the credit crunch, private equity retrenchment and minimal stock market hedging.
The fears have been stoked by poor performance data beginning to emerge. As well as some truly dreadful results -
New York activist Pardus Capital was down almost 25 per cent in the past two months, investors say - many lesser-
known hedge funds adopting the approach have turned in weak numbers.
Last week Deephaven Capital, the $4bn Minnesota-based hedge fund division of Knight Capital, said it had decided
to close its $780m Event funds, "given the macroeconomic environment, performance in the past nine months,
declining investor interest in event-driven investment strategies and significant redemption requests".
Deephaven's Event funds are down 6 per cent this year and have lost almost 16 per cent since May.
David Smith, head of GAM's funds of hedge funds, said the event-driven sector was down 4-6 per cent this month,
with a few exceptions.
"The event-driven space suffered because all of a sudden the alleged bids that were out there from the private
equity guys evaporated," he said.
Event-driven funds adopt strategies that are divided into two broad approaches, and both have been hurt by the
credit crunch and stock market problems.
The first involves buying "value" stocks discarded by other investors, but where they expect or - in the case of
activists - create a catalyst to push up the shares. These would be the shares worst hit during a stock market
rout and a flight to quality.
The second strategy is merger arbitrage, betting on whether deals will complete. As the credit crunch hit and
many deals were abandoned last year, the gap between share prices and the bid value soared, hurting re-turns -
although offering big opportunities for funds able successfully to select the deals that went through.
"Many people have done well pursuing trades where they would take large stakes in businesses and then either
force them to sell or to do a leveraged recapitalisation [borrowing to buy back shares]," said the manager of a
$1bn US-based event-driven fund. "That's not going to work any more because there are no buyers and there's no
money for recaps."
Still, chief executives facing assaults from activist hedge funds should not relax just yet.
Many activist funds, in-cluding Pardus, SRM Global and London's famed Children's Investment Fund, have
locked investors' money in for long periods, so they will not soon suffer from withdrawals.
With event-driven managers raising $15bn in the second half of last year and the smaller merger arbitrage
specialists pulling in another $2.3bn, according to Chicago-based Hedge Fund Research, funds are still awash with
cash.
So far there is no sign of withdrawals from activists, according to Roxanne Martino, chief executive of Harris
Alternatives, an $11bn Chicago fund of hedge funds.
Some funds have a side line in distressed debt in-vesting, and hope a recession will lead to opportunities to
take on troubled companies.
Furthermore, some funds have weathered the market storms thanks to smart hedging strategies or clever stock
picking.
But with investors stepping back from the sector, the bulk of activist hedge fund managers will be feeling
more nervous than before. Whether this leads them to be more cautious or to fight like cornered rats
remains to be seen.
By James Mackintosh
The Financial Times (London)
February 4, 2008
Activist hedge funds have been favourite hate figures for years, with trade unions, corporate bosses and
continental European politicians all criticising confront-ational attacks on underperforming companies.
Now their biggest group of supporters is also growing uneasy. Hedge fund investors, who piled $31bn into
activists and other event-driven funds last year in the hope of fat profits, worry the sector will be hurt this
year by the credit crunch, private equity retrenchment and minimal stock market hedging.
The fears have been stoked by poor performance data beginning to emerge. As well as some truly dreadful results -
New York activist Pardus Capital was down almost 25 per cent in the past two months, investors say - many lesser-
known hedge funds adopting the approach have turned in weak numbers.
Last week Deephaven Capital, the $4bn Minnesota-based hedge fund division of Knight Capital, said it had decided
to close its $780m Event funds, "given the macroeconomic environment, performance in the past nine months,
declining investor interest in event-driven investment strategies and significant redemption requests".
Deephaven's Event funds are down 6 per cent this year and have lost almost 16 per cent since May.
David Smith, head of GAM's funds of hedge funds, said the event-driven sector was down 4-6 per cent this month,
with a few exceptions.
"The event-driven space suffered because all of a sudden the alleged bids that were out there from the private
equity guys evaporated," he said.
Event-driven funds adopt strategies that are divided into two broad approaches, and both have been hurt by the
credit crunch and stock market problems.
The first involves buying "value" stocks discarded by other investors, but where they expect or - in the case of
activists - create a catalyst to push up the shares. These would be the shares worst hit during a stock market
rout and a flight to quality.
The second strategy is merger arbitrage, betting on whether deals will complete. As the credit crunch hit and
many deals were abandoned last year, the gap between share prices and the bid value soared, hurting re-turns -
although offering big opportunities for funds able successfully to select the deals that went through.
"Many people have done well pursuing trades where they would take large stakes in businesses and then either
force them to sell or to do a leveraged recapitalisation [borrowing to buy back shares]," said the manager of a
$1bn US-based event-driven fund. "That's not going to work any more because there are no buyers and there's no
money for recaps."
Still, chief executives facing assaults from activist hedge funds should not relax just yet.
Many activist funds, in-cluding Pardus, SRM Global and London's famed Children's Investment Fund, have
locked investors' money in for long periods, so they will not soon suffer from withdrawals.
With event-driven managers raising $15bn in the second half of last year and the smaller merger arbitrage
specialists pulling in another $2.3bn, according to Chicago-based Hedge Fund Research, funds are still awash with
cash.
So far there is no sign of withdrawals from activists, according to Roxanne Martino, chief executive of Harris
Alternatives, an $11bn Chicago fund of hedge funds.
Some funds have a side line in distressed debt in-vesting, and hope a recession will lead to opportunities to
take on troubled companies.
Furthermore, some funds have weathered the market storms thanks to smart hedging strategies or clever stock
picking.
But with investors stepping back from the sector, the bulk of activist hedge fund managers will be feeling
more nervous than before. Whether this leads them to be more cautious or to fight like cornered rats
remains to be seen.
