DEALKTALK-Event-driven hedge funds popular in M&A revival

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* Funds of funds upbeat on distressed, M&A hedge funds

* Debt restructuring seen offering opportunities

* This week’s M&A bonanza adds to expectations of a pick-up

By Laurence Fletcher

LONDON, July 23 (BestGrowthStock) – Hedge fund selectors are backing
managers who bet on corporate events such as mergers, bankruptcy
or restructuring, believing there will be more “special
situations” to exploit as firms battle through the downturn.

Funds of hedge funds believe “event-driven” managers will
profit as distressed companies are forced to restructure their
debts to fend off creditors, and those with cleaner balance
sheets look to M&A to boost sales in a low-growth environment.

“There are lots of opportunities now in distressed. Banks
aren’t lending, the bond market has shut down. Some companies
are going to go bankrupt,” said Fabrizio Ladi Bucciolini, head
of alternative investment at Swiss-based Reyl Asset Management.

“Companies that went bankrupt in ’08 and ’09 are coming out
of it now. It’s just a perfect environment,” said Bucciolini,
who has 40 percent of his multi-strategy fund in liquid
distressed funds.

Hedge funds can profit from such events by buying the firm’s
bonds at deep discounts to par and hoping they rise in value,
and often by holding them until debt is restructured and their
bond is converted into equity. They can also short the equity or
buy credit default swaps to hedge their positions.

In Europe $1.4 trillion of total corporate debt is set to
mature over the next five years, of which 20 percent is sub
investment grade, according to S&P. Moody’s estimates that more
than 250 billion euros ($319 billion) of leveraged buyout bank
loan refinancing is due by 2015. [ID:nLDE65G0ZU]
“We continue to increase event-driven strategies,” said
Robert Marquardt, founder of fund of hedge funds firm Signet.

“There are thousands of indebted companies that must
restructure their debts over the next three, four years, either
through issuing new debt, through equity issuance, through asset
sales or cash pay-down, or, frankly, through bankruptcy.”
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For a factbox on different hedge fund strategies:
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M&A FUNDS

After 20 percent returns in 2009’s bull market, event-driven
funds are up just 1.84 percent in the first six months of this
year, hampered by losses in May and June’s volatility.
Event-driven funds no longer dominate new launches as they
did earlier this year, according to one prime broker who
declined to be named, but funds of funds are still upbeat.

Jose Galeano, chief investment officer of Swiss-based fund
firm 3A, has recently bought positions in Jana Offshore Partners
and York European Opportunity hedge funds, lifting his
event-driven exposure to 18.6 percent from 12.1 percent.

These event-driven funds focus both on mergers and also on
strategies such as capital structure arbitrage, where managers
can profit from anomalies in a firm’s capital structure, for
instance by buying a high-yield bond and shorting the equity,
thereby hedging out equity risk.

“(Companies) will be issuing … debt with lower costs.
Balance sheet restructuring is an opportunity for people doing
capital structure arbitrage,” said Galeano, whose firm runs fund
of hedge funds ALTIN (ALTN.S: ).

However, funds that bet on M&A events, often by buying
shares in the target company and shorting the acquirer, are also
popular with funds of funds.

While recent dealmaking has been stymied by government debt
worries — European M&A is up less than 2 percent in the first
half of this year from the crisis-ravaged first half of 2009 —
optimists point to rising corporate cash balances and improving
financing markets, and say many companies need to offset anaemic
growth prospects with smart acquisitions.

This week has seen a flurry of announced or possible deals
including Reckitt Benckiser Group’s (RB.L: ) $3.8 billion buy of
condom-maker SSL International (SSL.L: ) and revived tie-up talks
between GDF Suez (GSZ.PA: ) and Britain’s International Power
(IPR.L: ).

Fund of hedge funds firm Oakley has invested 10 percent of a
newly launched fund in a merger arbitrage fund. [ID:nLDE6671FC]

Meanwhile, Magnetar is planning to launch an event-driven
fund for its founder Alec Litowitz, to bet on M&A and other
corporate events. [ID:nLDE64O1R6]

“Corporates have been very good at cleaning their balance
sheets and some have quite a lot of cash … We think some will
use some of the cash to acquire other companies,” said 3A’s
Galeano.

Stock Today

(Editing by Will Waterman)
($1=.7838 Euro)

DEALKTALK-Event-driven hedge funds popular in M&A revival