Cheyne European Event Driven Fund: Cheyne Capital Management (UK)
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Although many people would take one look at Europe and turn away, Simon Davies, head of the event driven division at Cheyne Capital, sees a wealth of opportunities. As one of a team of nine for the European Event-Driven Fund, Davies is surprisingly upbeat about European merger and acquisition (M&A) activity.
"For us, I have always said we have never needed a large-cap M&A boom to be able to make money. Our fund is nimble enough to be able to invest in mid-cap M&A situations and credit as well,” he explains.
Performance of the fund, which returned a healthy 20.48% in 2010, is generated mainly by equity mid-cap and credit. While Davies admits M&A volumes are down significantly on pre-crisis levels, that drop in activity is mainly confined to the large-cap sector.
"We are running at around one investable M&A deal a week, which is low by historical standards but it’s okay for me. Mid-cap M&A is a sweet spot, much less arbitraged and especially so in today’s environment,” he says. "On a risk/reward basis, these are the best spreads I have seen in my 11 years of arbitrage and very few are taking advantage.”
The reasons for the lack of arbitrage, believes Davies is purely down to uncertainty. "The risk of the deal is that the market is much more uncertain than it was two months ago – you can’t argue with that. The amount of return you can make is much more adjusting for the increased rate of risk. Some of these deals in my 16 years of experience are the best, without a doubt.”
The mandate for the fund is deceptively simple: every position requires a strong catalyst in the short term that will move the instrument’s valuation. Because the team is experienced in investing in all parts of the capital structure, deals can be structured around credit and equity.
Davies points out the fund’s ideas are generated by ‘hard’ events. "Because we’re hard event driven, we are driven to events that have been announced or are about to be announced.”
In terms of idea generation, Davies and his team tend to respond to announcements. "A lot of our ideas actually come from monitoring what’s happening in Europe,” he says. "We come in first thing in the morning and there will have been a 7am regulatory news announcement about a stock that has been bid for so we will focus on that.” Ideas also come from brokers, bankers, lawyers and a network of contacts throughout Europe.
"Depending on where we are in the cycle, the vast majority of investments don’t make it on the book. It more or less depends on the cycle. At present there is a particularly high amount of good-quality situations, so there is a higher hit rate. But maybe that is a little bit unusual because of the current climate.”
Team event
The event driven team includes co-manager Michel Massoud as well as Peter Rushton, portfolio manager for the team, and analysts Nick Kroepfl, Joseph Gebran and Anooj Unarket with Deepak Verma as business manager and two on support.
Cheyne, one of Europe’s largest portfolio management groups, specialises in investment grade and crossover corporate credit. The event driven team is one of the largest and most experienced operating in Europe. The team invests only in liquid, event driven situations with definite short-term catalysts.
In addition to Davies’s own 16 years’ experience, 11 of which were spent investing in the event driven sector, co-manager Massoud has 13 years’ experience with seven spent investing in this specific sector. The rest of the investment team have combined experience of 24 years. The four senior members of the team have all worked together between six and 11 years. This makes for a solid base of experience coupled with a team that works well together.
Davies says the team tends to work in pairs on the initial work on screening positions. If an idea looks good, it moves through to the next stage.
Depending on what kind of investment it is, the team might need to move quickly to take a position. "You may need to be in a position where you can invest when the market opens, so it is very intense in that initial period when you are making an initial investment,” says Davies.
On the other hand, complicated distressed credit deals can take much longer, with a lot of research and analysis needed before the team is ready to act.
"Those are two extremes but that is the spectrum. Throughout the process it becomes pretty clear whether the investment will be made or not.”
With such an experienced team, Davies says the group can decide whether the investment is interesting or not and what the potential risk/return might be. For Davies, it is just as important to get this right.
"You can be pretty quick to understand whether the investment is interesting or not based on what the risks are and what the potential return is measured against what you can lose if it’s wrong.”
The next step is to decide if the team is comfortable with the risks. "The risk/reward may be very good, but if those risks are really unfathomable, we’re not going to invest. We’re going to have to take a knowledgeable view on the outcome and whether those risks are manageable. If it is not, it won’t happen.” |
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Author Resource:-
Cheyne Capital is a hedge funds management company that operates worldwide
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By :
Rivington Charlotte
Submitted
2011-11-16 03:29:06 |
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