Allergan / Actavis Deal Might Turn The Tide For Event-Driven Funds

Event-driven hedge funds have historically managed to nab the top spots whenever it comes to sector performance. However, this year has not been the best year for event-driven funds despite much talk about a consolidation wave in different sectors of the market. This year we are seeing credit and managed futures strategy funds among the best performing hedge funds.

2014 YTD Hedge fund strategy returns Allergan

Bill Ackman set to make highest return

There are however a few exceptions, the most notable one being Pershing Square. Bill Ackman’s Pershing Square was flying high with a 32.8% return at the end of October, and this was before the announcement of Allergan’s acquisition by Actavis plc (NYSE:ACT). Ackman who owned a 9.7% stake in Allergan, Inc. (NYSE:AGN), sold part of his position over the last few days, collecting a massive profit. Ackman’s total paper profit on the entire holding easily eclipsed $2 billion at the price Actavis has offered.

Actavis Allergan Event-driven hedge funds

Event-driven funds get a boost in November with Allergan and Actavis

In a report, Lyxor said that this $66 billion pharma sector deal could just be the key to unlocking returns at event-driven hedge funds. Lyxor’s research report noted that October was a tough period for funds applying merger arbitrage and special situations strategies, but this month pressure eased off with the Allergan, Inc. (NYSE:AGN)/Actavis plc (NYSE:ACT) deal. Lyxor’s Event-driven Broad Index has risen 0.9% MTD. Merger Arbitrage funds count Allergan in their top ten long positions and benefited from the price activity in both companies.

Several other hedge funds have also made big gains on their positions in Allergan. Paulson & Co., Viking Global, Steadfast Capital, Eton Park and York Capital also have long positions in the company according to 13f filings.

Other plays that contributed to gains were Medtronic, Inc. (NYSE:MDT) and Comcast Corporation (NASDAQ:CMCSA), said Lyxor. Medtronic posted good numbers in third quarter earnings and reaffirmed its plan to buy Covidien plc (NYSE:COV). Notwithstanding the regulatory uncertainties, Comcast Corporation (NASDAQ:CMCSA) also made clear that it will continue with its $45 billion acquisition of Time Warner Cable Inc (NYSE:TWC). Both events contributed positively to the event-driven strategy sector.

eVestment says redemptions likely at event-driven funds

It is an unfortunate coincidence that event-driven hedge funds, who won the top returns in 2013, are among the sectors not doing well this year. Mick McGurie’s Marcato Capital Management is down 2.13% YTD after posting a 26% return in 2013. Jeffery Altman’s Owl Creek was down 10.35% through last month; after Altman’s event-driven strategy posted a brilliant 48% gain in 2013. Richard Perry’s Perry Partners is in the same boat, down 2.3% YTD after being up 21% in 2014.

eVestment was not as optimistic about the event-driven strategy as Lyxor. In their October asset flow report, they note that there are chances of redemptions at event-driven hedge funds. The report said that outflows have increased over the past two months in this strategy and this could indicate that redemptions will soon follow.

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