Not really agree that but worth reading...Journalist don't really get it
FT Article
“I recommend the BlackRed event-driven hedge fund.”
“BlackRed? Don’t you mean BlackRock?”
“No, BlackRed. It’s relatively new but follows a time-honoured strategy. All terribly clever.”
“Really? How does it work?”
“Well, like most event-driven hedge funds, it uses a proprietary screening methodology to evaluate a range of investment opportunities ahead of corporate transactional events – such as mergers and refinancings – that may include arbitraging various debt securities, as well as taking equity positions to gain selective exposure to acquisitions, consolidations, restructurings, bankruptcies and liquidations. Its managers continually scour the market for potential valuation anomalies surrounding these events. Then they make a high-conviction asset allocation call and generally place 100 per cent of investors’ capital on Noir.”
“Noir?”
“Oui. Or rather, yes. But not always. In certain market conditions, they might allocate cash to Impair.”
“As in impaired credit?”
“No, Impair. You know: French for 1, 3, 5, 7 etc, up to 35. You probably call it ‘odd’.”
“I certainly do.”
“Would you rather they put it on 19-36?”
“Hang on. Are you trying to tell me they just bet people’s money at a roulette table?”
“Oh, no, no, no. Sometimes they use a revolving credit facility.”
“Revolving?”
“Well, more like spinning – although that brings some tail risk.”
“Tail risk?”
“Mmm – the coin could come down heads.”
Some investors might wish real-life, event-driven hedge funds offered this risk/return profile. Their actual bets this year – on politically sensitive pharma deals and US mortgage settlements – have proved scarcely more profitable than putting everything on black.
According to Bloomberg, “billionaire John Paulson posted a 14 per cent loss in his firm’s event-driven hedge fund” in October alone – after events at drugmaker Shire and lenders Fannie Mae and Freddie Mac took a turn for the worse. Shire’s shares lost a quarter of their value after AbbVie pulled out of a takeover that would have cut its US tax bill; and holdings in Fannie and Freddie more than halved when a US court rejected shareholder payout claims. These losing bets took the total hit for investors in Paulson’s fund to 25 per cent in 10 months.
Nor was this an isolated run of bad luck. This year, several high-profile funds, including Bill Ackman’s Pershing Square and Richard Perry’s Perry Capital, also placed their chips on Fannie, Freddie and Shire. Tyrus Capital – a $1.4bn event-driven hedge fund based, appropriately enough, in Monte Carlo – lost 10 per cent of its value on the Shire bet alone.
Nor is this unusual. Earlier in the year, so many event-driven hedge funds placed disastrous bets on takeovers of Time Warner and T-Mobile that traders described their attempts at “merger arbitrage” as “#arbageddon”.
By October 31, the average event-driven hedge fund was on a -3.6 per cent losing streak for 2014, as measured by the Hedge Fund Research index – and getting closer to 2011’s annual loss of 4.9 per cent.
Wealth managers who choose hedge funds for clients point out that, in other years, gambling on mergers has paid off. That same index recorded a 13.8 per cent gain last year, and 6 per cent in 2012. You win some, you lose some, they suggest.
Kirsten Boldarin, a director of Stonehage Investment Partners, says: “All strategies can suffer extended fallow periods where an approach doesn’t add value, despite the manager exhibiting long-term competence.”
Pau Morilla-Giner, chief investment officer at London & Capital, reckons investors in hedge funds just need to hedge their own bets. “Equity-focused hedge funds represent just one section of the hedge fund industry and we advise that they are combined with other strategies to better diversify,” he says.
Investors, however, might ask themselves two questions.
First, why are we bankrolling so many managers to play out dodgy hunches? In the third quarter, Hedge Fund Research found that $11.4bn of new capital flowed into event-driven strategies, taking the total invested to $756bn – more than a quarter of all hedge fund assets.
Second, why are we paying managers – including “the billionaire John Paulson” – up to 2 per cent of all their losing bets and 20 per cent of all winnings? Forbes estimates that this fee structure allowed the world’s 25 best-paid hedge fund managers to earn $24.3bn last year.
Some institutions have already decided “rien ne va plus!” Calpers, the largest US pension fund, has taken $4bn off the table, claiming that hedge funds are too complex and costly.
In the meantime, this column can offer a cost-effective insurance policy for all concerned readers: $1,000 to correctly predict the outcome of any corporate event. Or your money back.