Event Driven market outlook

Below are highlights of our market outlook and views on the forward opportunity set for Event Driven hedge funds.

Uncorrelated Alpha

Event Driven strategies invest in companies that have announced, or are expected to undergo, a material change (a "corporate event" or a "corporate catalyst") that will impact their stock prices.

Investable corporate catalysts can include change events such as mergers, spin-offs, restructurings, and C-suite management changes (see spectrum below). These investments typically correlate less with day-to-day market movements, and more with the outcome of the specific event.

Events are categorized as either "hard" or "soft" given these two sub-strategies have distinct behavioral characteristics and corresponding risk management requirements.

Hard Catalysts include publicly announced mergers; these corporate events are binary and governed by a legal contract.

Soft Catalysts include investments in companies that are undergoing or are expected to undergo a transformative corporate initiative that exhibit a continuum of outcomes.

Credit includes investments across a broad spectrum of corporate catalysts that may either serve as an equity substitute to augment the risk/reward profile, a hedge, or a standalone credit thesis.

Outlook

Increasing opportunity for Event Driven

The coming months will provide further insights into the key risk areas that equity markets are most concerned about:

• the banking crisis, and whether it’s spreading or has been quelled
• inflation, and whether the impact of both monetary policy and the banking crisis sufficiently curbs demand
• monetary policy, and whether the Fed has much further to tighten or if a pause is in the offing, and
• GDP, and whether the economy will endure a harder or softer landing and how long any downturn or slowdown might last.

As the market digests these developments, we see the potential for volatility on the horizon, but remain constructive in our overall outlook. Despite the continued potential for swift moves in specific sub-segments (similar to the violent downward revaluation of regional banks in the first quarter), we believe that the overall rate of change (in either direction) throughout the remainder of the year is likely to be lower than it was in 2022. This backdrop, we believe, should continue to unlock an increasingly fertile opportunity set for hard catalyst, soft catalyst and credit investments.

Attractive soft catalyst opportunity

We believe the market turbulence likely resulting from these risks to investors perception, whether manifested via volatility, dispersion, or overall market direction, will continue to merit soft catalyst investments, on both a bottoms-up and top-down basis. Turbulence often generates mispricing, idiosyncratic alpha buried within the noise of the market.

Burgeoning opportunity in credit

The inflation / growth tug of war has coalesced around a final 25 basis point hike at the Fed’s meeting in May, followed by ~190bps of rate cuts over the course of the following 18 months.

US equities have generally rallied in the months following the end of past Fed tightening cycles, which we believe should coincide with a decent set up for strong credit performance over the intermediate term.

We balance this perspective with an air of conservatism and will continue to monitor the macro-economic picture with the Bloomberg consensus probability of a US recession in the next 1 year up to ~65%.

Constructive on hard catalyst

We are constructive on the outlook for M&A, particularly as we move into the second half of 2023. While M&A activity in the first quarter remained muted, as macroeconomic uncertainty, the persistent rise of interest rates, geopolitical tensions, and global regulatory pressures continued to be headwinds for dealmaking, we did see pockets of strength within the healthcare industry.

Over the year, we expect CEO confidence to improve as the macro picture becomes less unclear and strategic buyers to face continued pressure to create value through transactions amidst a challenging organic growth environment. Additionally, we believe the need for CEOs to address a post-COVID paradigm will continue to spur M&A activity.

Against this backdrop, announced M&A continues to provide attractive rates of return of over 20% IRR for 3-month duration. At levels that are three times the historic norm, we believe investors are more than compensated for a more volatile environment.