Robust performance

Event driven strategies, including merger arbitrage and distressed securities, have performed robustly during the three years to August. Over the past year, the funds in the sector tracked by S&P Micropal returned 17.6% in dollar terms. In the three-year period the sector returned 44.21%, giving an annualised rate of return of 14.2% and annualised volatility of 13.18%.

The relatively strong performance of all the funds, rather than a few dragging up the average of the rest, is related to the lower-risk strategy associated with the majority of arbitrage strategies pursued by hedge funds. There has been a strong flow of deals in the US for several years and also in Europe, specifically since the introduction of the euro. This has increased merger arbitrage trading opportunities, which has attracted assets to this sector. In turn the sector has repaid investors well, with Zweig-DiMenna's Special Opportunities fund topping the charts. This New York-based $700m fund, one of the largest in existence, has returned almost 150% during the past three years, giving an annualised return of 35.2%.

Lots of players and capital have been forced out of the distressed securities market, leaving opportunities for the remaining players.