Hedge Funds Seeking Top Talent as Relative-Value Arbitrage Draws in Largest Capital Inflows
Investors, in search of greater returns, are pouring money into hedge funds. The average hedge fund worldwide returned 7.7% in the first half of 2007, according to Bloomberg. That beats the S&P 500’s 6.9% gain, including dividends. The high-risk, high-return industry promises returns that are less vulnerable to declines in the stock and bond markets. In order to deliver on that promise however, hedge funds employ numerous trading strategies. And executive recruiter, A.E. Feldman, says that as more investors bet on alternative investments, hedge fund opportunities are growing exponentially. The recruiting firm, which focuses on financial services jobs, says top investment professionals specializing in relative-value arbitrage, equity hedge and event-driven strategies are in high demand.
Equity hedge and event-driven funds are among the hedge fund strategies resulting in the biggest gains, according to Hedge Fund Research (HFR). But the strategy that saw the largest capital inflows in the second quarter is relative-value arbitrage.
Relative-value arbitrage is a broad strategy that includes taking opposing positions in pairs of closely related securities. HFR says the strategy drew $16.4 billion in new assets in the second quarter, up from $10.3 billion. The strategy goes long on assets perceived to be undervalued and short on assets seen as overvalued. The relative-value category includes multi-strategy credit funds with sub-prime exposure. HFR reports that the Relative Value Arbitrage index was up 3.2% for the second quarter as a whole.
Event-driven funds also gained $9.48 billion. Such strategies trade on the prospects for corporate mergers and restructurings. Fund managers who use what the industry calls event-driven strategies, such as buying shares in a potential target or selling short a likely bidder, have produced significant returns as deals have grown in number and size.
A quarterly survey of 11 funds of hedge funds managers based in the U.S. and Europe conducted by Reuters shows that event-driven strategies are expected to deliver the best returns in the second half of the year, buoyed by expected takeover activity, company restructuring and share buybacks. Mohamed Niang at Olympia Capital Management in Paris told Reuters, “As long as there is cash in the global economy, good balance sheets, M&A opportunities, then event-driven strategies will keep on performing well.” HFR President, Kenneth Heinz adds that “The movement of assets into event-driven suggests that investors are anticipating the market for corporate transactions will continue to create a conducive operating environment for hedge funds.
With near-record inflows, hedge fund performance remains strong. The industry took in $58.7 billion in the second quarter, just shy of a record $60 billion gain in the first quarter, according to HFR. Following the cash inflows and investment gains, hedge fund assets grew to $1.74 trillion, up 22% from the end of 2006.
