The so-called death of event-driven
The activists’ playbook for
juicing shareholder returns is not working, says Stephen Foley
When Daniel Loeb,
the activist investor, addressed the annual meeting of investors in
Third Point, his hedge fund, last month, he opened with an amusing
slide. It showed a bloodied and battered cartoon version of himself
staggering towards a tombstone engraved with the message “RIP
event-driven investing, 2015”.
Lest anyone think
Third Point is predicting the demise of one of the most lucrative
hedge fund strategies of the past few years, the slide was titled “The
so-called death of event-driven investing”. But even Mr Loeb admitted
the industry is at an inflection point.
Funds in the
event-driven category are a heterogeneous bunch, but one way or
another they aim to profit from corporate moves such as financial
acquisitions. As markets shifted in the past year, many
funds found themselves betting on the wrong kinds of corporate moves.
Event-driven strategies that worked in an equity bull market are not
doing so now.
particularly the case for the brand of activism with which Mr Loeb and
rivals such as Bill Ackman and Carl Icahn have terrorised corporate
managements for years. These attacks look like being a lot less
widespread in the future.
cause is the string of terrible results from activism’s leading
lights. Last year, Mr Loeb’s equity investments lost 3 per cent, but
the truly awful headline numbers came from David Einhorn’s
and Mr Ackman’s Pershing Square, both of which were down 20 per cent.
A more important
factor: the fundamentals have shifted.
Since the middle
of last year, the outlook for the global economy has soured
considerably. Earnings for US companies, in particular, are
contracting after years of artificial growth from share buybacks. Even
if one does not accept a gloomy economic prognosis, one cannot deny
that corporate borrowing costs have risen and credit markets have
become more volatile and unpredictable.
playbook for juicing shareholder returns — lever up a company’s
balance sheet and return cash to investors — simply does not work in
the current environment, and long-term investors are revolting. One of
Mr Loeb’s investment rules is “no financial-engineering investments in
spooked markets”, and the likes of Larry Fink, chief executive of
BlackRock, the world’s largest asset manager, have issued
strident warnings against
and even dividends.
It is a sentiment
echoed by investors up and down the market. Jonathan Coleman,
small-cap portfolio manager at Janus Capital, told me recently he has
made balance-sheet strength a key demand at meetings with his
portfolio companies over the past few months. Credit markets are more
uncertain and refinancing a mountain of debt is not likely to be as
easy in the future as it has been in the era of quantitative easing by
the Federal Reserve. “There is nothing that can do as much damage to
the equity as a risky balance sheet,” he said.
It is hard not to
read all these signs from the financial markets and from the
investment community as the early warnings of a turn in the economic
cycle, but of course the timing of the next downturn is uncertain and
there could still be another leg of growth between now and an eventual
investors are not waiting to find out; they are already in a period of
retrenchment. SkyBridge Capital, a powerful fund of hedge funds
company, said it took $1bn away from event-driven managers including
Mr Loeb, Barry Rosenstein of Jana Partners and John Paulson in the
final months of last year. HFR, the data provider, recorded $2.2bn in
outflows from the $745bn event-driven hedge fund industry in the
fourth quarter of last year and the bleeding appears to have
accelerated in 2016.
event-driven hedge funds lost 4.7 per cent last year, according to HFR,
so it is little wonder that they are reassessing their commitment to
Mr Loeb told his
investors that a shake-out of smaller funds will create more equity
market opportunities for seasoned managers, and he has shifted his
focus to other kinds of corporate events around which to invest.
Distress in some sectors, such as
could throw up lucrative opportunities. He is also talking up Third
Point’s credit portfolio, which is larger than its more famous
investing is not dead, it will just morph. Even activism may have a
cycle or two in it yet. But it seems a safe bet that the Loebs and
Ackmans of the world will be less loud this year and for the
Stephen Foley is
the FT’s US investment correspondent
Copyright The Financial Times Limited 2016.