Merger arb, SPACs and credit steal the show in HF land

With higher beta hedge fund strategies having been hit-or-miss over the last few weeks as the market changed course prior to its post-election surge, observers say that merger arbitrage and long/short credit strategies have done well. A prime example is Saba Capital Offshore, Boaz Weinstein’s legendary credit strategy was up over 79% for the year to date through early October, according the HSBC rankings. The firm’s credit relative value strategy is long/short credit offering with a market neutral approach. The firm is also known for its investment process that relies both on quantitative models and in-depth fundamental analysis. Should Saba’s gains hold up through year end, the returns will be the best since 2016 when the firm was up over 22%. According to Lyxor Asset Management, long/short credit was up 1.8% in the third quarter and for the year through October is up 0.5%, within its UCITS peer group. When it comes to merger arbitrage, the strategy outperformed according to Lyxor with flat returns last week and a positive performance for the full month of October of 0.7%. The strategy is up 5.27% on average, according to HSBC, which reports at least one fund, Glazer Enhanced Offshore, being up 13.87% for the year to date through September. According to Lyxor’s analysis, merger arbitrage funds are not deploying assets based on views on the election outcome and cash holdings are elevated currently. The team at the fund of funds group said that the key theme to watch will be Special Purpose Acquisition Companies (SPACs) and how much they buoy corporate activity. This year has seen a record level of fundraising in the space. The SPAC boom has brought increased liquidity to the market and has garnered interest among investors. According to Lyxor, they are attractive for merger arbitrage strategies as they offer an attractive and low volatility return profile. SPACs also were contributors to returns last month, analysts added. With $50 billion of unlevered capital available, according to Dealogic as of the end of the third quarter, Lyxor expects robust M&A volumes to continue in quarters to come.

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