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Event driven to benefit from US stock rises

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Lyxor’s cross asset team report finds that the new US president’s dynamic start has encouraged US stocks. The firm writes that President Trump moved fast and strong, issuing 12 executive orders in a matter of days, covering areas such as immigration, health care, trade, infrastructure and energy.

“US stocks welcomed the move with a bang. The S&P 500 is up 1.3 per cent since inauguration day. Treasury yields and the US dollar have also moved higher as stronger economic activity should translate into higher inflation and a faster pace of monetary normalisation.

“Hedge funds reaped benefits of such upbeat market movements. The Lyxor hedge fund index is up 0.5 per cent last week, with CTAs and Global Macro managers outperforming. Fixed income arbitrage managers also did well, in a context where rates implied vol has remained elevated since the Republican victory at the U.S. election. Recent developments thus support our constructive stance on these strategies.

“On a negative note, Event Driven underperformed. Positions on Rite Aid, a retail pharmacy chain targeted by Walgreens Boots Alliance, contributed negatively to performance on the back of anti-trust concerns. Walgreens plan to sell hundreds of drugstores to rivals hadn’t convince the Federal Trade Commission to sign off on the deal.

“But another mega merger in the pharma sector is set to boost Event Driven performance. Towards the end of the week, Johnson & Johnson announced a USD30 billion deal to acquire Actelion, a Swiss biotechnology firm, after months of stop-start negotiations. Actelion’s share price rallied 20 per cent in the wake of the announcement. This is set to contribute significantly to Event Driven gains considering the fact that the Swiss company is the top long exposure of merger funds in our sample. However, the rally in Actelion’s share price falls out of the period under review in this report and is not reflected in the data.
“The corporate tax reform envisioned by the new US administration has been considered as an opportunity for both the technology and the pharma sector. They would benefit from tax breaks on cash repatriation. That could potentially extend the wave of M&A activity in these sectors. Event Driven managers appear to be at the forefront to benefit from it.”

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