Event driven and their sub-group of distressed debt hedge fund strategies account for almost 12% of the global hedge fund assets under management, standing at US$266.5 billion as of November 2016. Despite posting the best returns among hedge fund strategic mandates in 2016 (distressed debt and event driven strategies are up 11.89% and 8.15% respectively which compares with average global hedge fund gains of 3.50%), the two strategies have seen investor redemptions for most of 2016. Event driven strategies saw outflows of US$13.5 billion in 2016, while distressed debt hedge funds recorded redemptions of US$2.1 billion which compares with industry wide investor redemptions of US$28.2 billion for the year.
Figure 1 below shows the performance of event driven managers (and distressed debt strategy) since December 2007 against the backdrop of the benchmark Eurekahedge Hedge Fund Index, the S&P 500 Index and the BoFA US High Yield Index. Since December 2007, event driven and distressed debt hedge funds have outperformed their global hedge fund peers, with gains of 68.17% and 81.70% respectively while global hedge funds were up 55.33% over this period. Underlying markets as represented by S&P 500 High Yield Corporate Bond Index and the BoFA US High Yield Index gained 114.58% and 94.94% respectively since December 2007. Both event driven and distressed debt hedge funds have posted strong five year risk-adjusted returns – Sharpe ratio of 1.11 and 1.59 respectively. Distressed debt hedge funds posted better Sharpe ratio compared to underlying markets as seen in Table 1.
Distressed debt hedge funds have had an impressive turnaround from their lows in 2015, thanks to the significant and subsequent recovery in the valuations of companies’ underlying assets throughout this year. A rally in energy prices and the subsequent re-pricing of distressed debt assets with exposure to the energy sector has helped managers post strong gains, in addition to the gains they have realized from shorting interest rate sensitive debt assets.
Figure 1: Event driven strategies since 2007
Table 1: Event driven managers vs. underlying markets
Eurekahedge Event Driven Hedge Fund Index |
Eurekahedge Distressed Debt Hedge Fund Index |
Eurekahedge Hedge Fund Index |
S&P 500 Index |
S&P 500 High Yield Corporate Bond Index |
S&P GSCI |
Bank of America Merrill Lynch US High Yield Index |
|
|---|---|---|---|---|---|---|---|
| 2008 | (21.06%) |
(25.57%) |
(9.78%) |
(38.49%) |
(16.79%) |
(42.80%) |
(26.39%) |
| 2009 | 39.94% |
36.04% |
21.30% |
23.45% |
48.31% |
50.30% |
57.51% |
| 2010 | 15.38% |
23.24% |
11.55% |
12.78% |
14.87% |
20.44% |
15.19% |
| 2011 | (4.64%) |
1.09% |
(1.74%) |
(0.00%) |
7.56% |
2.07% |
4.38% |
| 2012 | 10.76% |
14.44% |
7.33% |
13.41% |
14.22% |
0.26% |
15.58% |
| 2013 | 13.63% |
15.81% |
9.24% |
29.60% |
4.06% |
(2.21%) |
7.42% |
| 2014 | 2.62% |
1.37% |
4.89% |
11.39% |
6.65% |
(33.87%) |
2.50% |
| 2015 | (0.95%) |
(4.18%) |
1.73% |
(0.73%) |
(2.52%) |
(25.46%) |
(4.64%) |
| 2016 Nov | 8.15% |
11.89% |
3.50% |
7.58% |
13.88% |
21.04% |
15.22% |
| 5 year annualised returns | 6.61% |
7.78% |
5.32% |
12.01% |
7.52% |
(10.53%) |
7.46% |
| 5 year annualised volatility | 5.07% |
4.27% |
3.19% |
10.34% |
5.04% |
19.09% |
5.54% |
| 5 year Sharpe Ratio (RFR=1%) | 1.11 |
1.59 |
1.35 |
1.06 |
1.29 |
(0.60) |
1.17 |
| 3 year annualised returns | 3.61% |
3.22% |
3.72% |
6.78% |
5.88% |
(15.27%) |
4.23% |
| 3 year annualised volatility | 5.25% |
4.22% |
3.03% |
10.71% |
5.36% |
21.50% |
6.02% |
| 3 year Sharpe Ratio (RFR=1%) | 0.50 |
0.52 |
0.90 |
0.54 |
0.91 |
(0.76) |
0.54 |
| 2 year annualised returns | 3.51% |
3.05% |
2.64% |
3.13% |
5.17% |
(11.54%) |
4.06% |
| 2 year annualised volatility | 5.81% |
4.80% |
3.27% |
11.85% |
5.92% |
24.34% |
6.87% |
| 2 year Sharpe Ratio (RFR=1%) | 0.43 |
0.43 |
0.50 |
0.18 |
0.70 |
(0.52) |
0.45 |
Source: Eurekahedge
Figure 3 shows the asset growth for event driven strategies since 2008. Asset base for event driven hedge funds grew by US$40.4 billion between 2008 and 2010, with performance-based gains a main source of asset growth. Over the recent years, assets for event driven hedge funds have trended lower with the mandate contracting US$6.7 billion in 2016, its steepest decline since 2011. Event driven managers have been hard hit by a spate of redemptions with 2016 net outflows coming in US$13.5 billion, up from outflows of US$3.9 billion over the same period last year.
Distressed debt hedge fund managers have had a modest growth in asset base since 2008, with AUM growing by 5% between 2008 and 2010, helped by positive performance-based gains as seen in Figure 4. The aftermath of the sub-prime crisis and the onset of the Eurozone crisis have led to steep redemptions between 2011 and 2012, with asset base trending lower over this period. In the subsequent years, asset base for the distressed debt hedge fund industry has recovered to some degree, expanding to US$61.9 billion in 2014. Asset base for the distressed debt hedge fund industry expanded a modest US$0.4 billion in 2016, up from a US$4.2 billion decline in assets last year. Redemption figures come in at US$2.1 billion for the year, down slightly from net outflows of US$2.9 billion recorded over the past year.
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