M&A, Emerging Managers Draw Interest

Terry Flanagan

Mergers and acquisitions and ‘emerging’ hedge-fund managers are among alpha-generating strategies deployed by buy-side investors so far in 2014.

The first half of the year has been largely tepid in the markets. The S&P 500 equity benchmark is up a more-than-reasonable 8%, but trading volume has been low, has has volatility, the lifeblood of traders and investors outside the buy-and-hold set. Additionally, persistently low interest rates have acted as an overhang, as many market participants say an increase is inevitable, and that increase may come quickly and cause dislocation.

Investors at Markets Media’s July 10 Summer Trading Network highlighted some opportunities that are a bit off the beaten path of the major indices.

One speaker at the New York event noted that 44 M&A deals were announced in the first half of 2014, 29 of which were more than $1 billion. The healthcare and media and entertainment sectors were especially active, and many of the deals were driven by cash-rich companies as strategic acquirers, suggesting that there will be more transactions when financial buyers return to the market.

“We need more LBO participation,” said one conference panelist.

For hedge-fund investors, one way to derive alpha is to allocate money to smaller emerging managers.

Large, established ‘name-brand’ hedge funds “continue to be asset gatherers,” one conference panelist noted. These funds hold appeal not necessarily for their return potential, but rather for their perceived safety and risk management. Investors who don’t need name brands may be able to find better returns without taking on more risk via emerging managers, according to the speaker.

Investors noted that today’s smart trades may be at risk of getting burned tomorrow, so it’s necessary to stay current on what’s working and what isn’t.

“There is a problem with crowded trades” especially in the summer when volume tends to be lighter and there less variety of opinions, one conference panelist said. “There can be risks you just don’t see coming.”

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