Event-Driven strategies saw exciting developments in recent quarters, in a context where global M&A volumes saw the strongest start to the year ever. Global M&A volumes, close to USD 1.5 trillion year-to-date, were fueled by a flurry of U.S. acquisitions and Special Purpose Acquisition Companies (“SPAC”) mergers. The record start to the year was also driven by several mega deals, such as General Electric’s $30bn agreement to sell its aircraft leasing business. In Europe, M&A activity jumped compared to last year, but year-to-date volumes fell short of 2018 highs. Notable transactions involved the USD 23bn proposed merger of Suez with Veolia, after months of conflict.
In terms of performance, Event-Driven strategies outperformed year-to-date, up +3.9% as of April 23rd according to our estimates. Within Event-Driven, Special Situations were up +6.7% and Merger Arbitrage up +3.3%. The latter is less directional and volatile, hence it underperforms Special Situation strategies in good times.
In our view, Event-Driven strategies remain one of the most attractive in the hedge fund space. Increased margin pressure and accelerated technological disruption related to the economic fallout from the COVID-19 pandemic has translated into huge corporate activity in Technology, Financials, Industrials, and Health Care.
Borrowing costs remain low and rising equity markets bolstered the purchasing power of companies paying for acquisitions with stock rather than cash. Such trends are expected to be a tailwind for Event-Driven going forward. Concerns related to SPACs, which saw a boom in recent quarters and cooled down recently, are overdone with regards to EventDriven performance. Merger strategies are in a good position to take advantage of arbitrage opportunities in a market which has been oversupplied and exuberant. Recent weakness allowed for separation of wheat from the chaff and helped demonstrate how risk management is key to SPACs investing. As some market participants have probably exited the space, the exuberance dissipated, and the market was brought back to more normalized levels. Flows were also redirected towards classical merger arbitrage situations, having a positive impact on spreads. Finally, we see increased SEC oversight and the recent dry up in SPAC IPOs as healthy.
There is no shortage of SPACs and the deal flow should remain strong. Out of more than 550 active SPACs, 400 are actively seeking their target according to Spactrack.
