The record number of mergers and acquisition deals announced in 2015 hasn’t led to a sustained interest in so-called merger arbitrage funds. Ucits-regulated M&A funds fell out of grace in the final months of the year, as they significantly underperformed their offshore peers.
According to data compiled by Bloomberg, companies concluded M&A deals worth a record $3.8trn in 2015, with the final quarter of the year being the busiest. The takeover boom indeed led to a temporary uptick in interest in so-called event-driven funds, as shown by Morningstar fund flows data. Investors poured in €1.9bn into this sort of funds between February and August last year. In the following three months however, while M&A activity reached a climax, inflows evaporated.
Investors are likely to have been disappointed by the returns delivered by merger arbitrage funds, especially in the second half of the year. The GAIA Paulson Merger Arbitrage Fund, one of the largest Ucits vehicles specialised in M&A, is for example down 9% since July. The only reason it made a positive total return in 2015 was the upside it enjoyed from the rising dollar, since the vast majority of the trades it conducts are in securities of US-listed companies. The PSAM Global Event Ucits and the York Event Driven Ucits funds (see graph below) did even worse than the Paulson fund.
Offshore does better
However, the HFRXMA Index which tracks the performance of merger arbitrage offshore hedge funds, posted a positive return of more than 8% in dollar terms in 2015. This huge discrepancy between Ucits and offshore is because merger arbitrage funds work much better in an unconstrained format, says Cian Walsh, senior portfolio manager hedge funds at the Norwegian wealth manager Formuesforvaltning.
“In order to manage an M&A fund properly, you’ve got to have access to the whole capital structure of the companies you invest in,” he says. “Ucits funds are usually heavily invested in equity. With offshore funds you get a much better dispersion.”