INSIGHT-In an M&A boom year, deals-driven hedge funds are burned by bad bets

Thu Dec 24, 2015 1:48pm EST
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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'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 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, 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, 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 Group Holding Ltd, because of concerns that shareholders would face a huge tax bill.   Continued...