Are hedge funds charting a comeback?

One thing to start: Advisers including Citibank, Morgan Stanley and Rothschild & Co are set to make more than £200m in fees if the £6.3bn takeover of Britain’s aerospace and defence contractor Meggitt is completed by US rival Parker Hannifin.

The UK government considers Meggitt to be a ‘critical supplier’ to defence contractors BAE Systems and Rolls-Royce © Bloomberg

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The great hedge fund debate

Back in 2008 Warren Buffett made a $1m bet that the S&P 500 index would outperform a basket of hedge funds over the course of a decade. 

Ted Seides, the investor on the other side of that bet, conceded defeat in 2017, after a particularly terrible year for hedge funds. 

Buffett was railing against the “2 and 20” fees — two per cent management fee and 20 per cent of performance gains — charged by hedge funds, which he found “ridiculous”

For many years, when the likes of George Soros and Jim Simons were considered the “masters of the universe”, few investors seemed bothered by hedge fund fees. Returns were so good that they made the fees seem insignificant.

George Soros is among the illustrious hedge fund investors who have converted their hedge funds into family offices since the financial crisis © AFP/Getty Images

But the years following the financial crisis have been difficult for the industry. Hedge fund performance, bar a few exceptions, hasn’t been particularly great and investors have embraced other options, including private equity and passive index funds. 

Now the pandemic has brought with it a new sense of optimism. According to this Big Read by the FT’s Robin Wigglesworth and Laurence Fletcher, 2020 was the best year for hedge funds since the aftermath of the financial crisis in 2009. Things are also looking up for 2021, prompting some to ask whether we’ll see a revival of the hedge fund industry.

On the face of it, things look good. Assets have increased (though in fairness, they’ve been on an upward trajectory since the 1990s), fees have come down slightly, and new fund launches outnumber closures.

Column chart of Assets under management ($tn) showing Hedge funds are back - but can their revival last?

Consider the fact that hedge funds are starting to make money again, and it starts to resemble something of a renaissance. But has much really changed since Buffett made that bold initial bet? 

While hedge funds have made money recently, so has everyone else. While the industry relishes its best year in more than a decade, stock markets are still outperforming, though many managers take issue with being compared to the S&P 500. 

Fees have come down somewhat — the traditional “2 and 20” is now on average 1.38 per cent and 15.9 per cent. But that is still expensive relative to what else is out there, and “star managers” tend to charge even more than 2 and 20.

The death of the traditional '2-and-20' hedge fund fee system. Performance vs management fees

What does appear to have changed is that hedge funds have finally stopped swimming against the tide. 

They’ve embraced the booming equity market and are doing well for it. Does that warrant the fees they charge? That’s for investors to decide. 

Aon tries to put a failed megamerger behind it

“If we lose, we’re in a world of hurt,” Aon’s lawyer said in a courtroom tussle last month, as the London insurance broker prepared for a showdown with the US Department of Justice, which had sued to block its $30bn tie-up with Willis Towers Watson.

The clash with the DoJ never made it to court: the companies abandoned the deal, saying they had reached an “impasse” with the US government. 

Aon is undoubtedly still feeling the pain. The deal’s collapse leaves it on the hook for up to $400m in costs, on top of the $1bn termination fee owed to Willis. 

But, Aon chief executive Greg Case hasn’t given up on M&A.

Greg Case, Aon chief © Bloomberg

He told the FT’s Ian Smith in an interview that Aon would “continue to have a strong pipeline” of deals in the works, citing its 2018 acquisition of the intellectual property firm 601West.

Aon’s share price could help in that regard. It jumped when the mega-deal collapsed and has since pushed on to record highs, after its second-quarter results revealed the strongest revenue growth in more than a decade.

Line chart of Price change over past three years (%) showing Aon regains share-price momentum after deal collapse

Now that the DoJ has quashed Case’s hopes of a deal that would’ve formed the world’s largest insurance broker — with a more than 40 per cent share in five important markets according to US regulators — where will he go from here? 

His comments to Ian offer a hint. Dealmaking is “not about size”, he said. “People get caught up in size.” 

Leisure M&A’s latest playbook: luxury resorts

Earlier this year, Hyatt Hotels Corporation chief Mark Hoplamazian recounted his darkest hours at the helm of the hospitality group to the FT’s Alice Hancock. As demand plunged “to almost zero overnight”, stress and exhaustion weighed on his ability to lead.

When the two caught up on Sunday, as Hyatt struck a $2.7bn deal to buy the KKR-backed resorts operator Apple Leisure Group, Hoplamazian was in much better spirits.

Mark Hoplamazian, Hyatt Hotels chief © Emily-Melissa Photography

Demand for leisure travel had “proven to be extremely durable”, he said. Buying Apple Leisure, which operates about 100 high-end, all-inclusive resorts, will increase its share of the luxury resorts market. 

That has been among the more resilient parts of the travel market during the pandemic, as wealthy customers rushed to book indulgent holidays after long periods of lockdown. 

Hoplamazian isn’t the only one with the idea, as hospitality groups in the luxury sector try and mitigate a longer-term lapse in business travel.

InterContinental Hotel Group announced plans to launch a luxury resort brand last week, while Marriott, the world’s largest hotel group, cited plans to increase its all-inclusive resort offering. The moves follow a spin-off by Europe’s largest hotel group Accor last year of its high-end leisure assets into a joint venture with the Hoxton hotel chain operator Ennismore.

Still, Hoplamazian said buying Apple Leisure would give Hyatt a competitive advantage over rivals who, he says, “haven’t expanded significantly yet”. 

Job moves

  • Credit Suisse has enlisted Axel Lehmann, former chief operating officer of UBS, to lead its risk committee as the Swiss bank’s new chair António Horta-Osório revamps its compliance controls in the wake of multiple scandals. Juan Colombas, who served in risk roles at Lloyds Banking Group and Santander, will also join the board.

  • Deutsche Bank Wealth Management has hired three executives from Credit Suisse to help lead its south-east Asia division: Urs Brudermann as a managing director and group head of the unit, Shawn Ngoh as a director, and Pichaya Prawanmeet as vice-president.

Smart reads

Mystery on Wall Street An obscure brokerage in Kazakhstan has eclipsed top-tier firms by scoring early access to some of the most exclusive US IPOs with the help of a secret hedge fund. (BBG)

Combine and conquer The European tech sector is striking new deals at record pace as start-ups look to gain a more global foothold. But many of the young companies are M&A rookies, and integration won’t be without its challenges. (Sifted

Playing the field Certain remote, white-collar workers are harbouring a secret: they’re juggling two jobs. As companies drift towards permanent or hybrid work-from-home models, the duplicity is just getting started. (WSJ)

News round-up

Aramco is in advanced talks to buy a $25bn stake in Reliance Industries (Bloomberg)

Cobham agrees to buy rival UK defence group Ultra Electronics for £2.6bn (FT) 

Lenders offer cheap deals to Silicon Valley to compete with flood of venture capital (FT)

Oatly revenues jump as appetite for dairy alternatives rises (FT) 

BHP edges towards oil and gas exit with Woodside merger talks (FT + Lex

HSBC increases Singapore wealth focus with Axa deal (FT) 

Saudi Aramco aims to raise at least $17 billion from gas pipeline (Reuters)

Sydney Airport rejects improved $16.8 bln buyout bid (Reuters)

Tim Hortons China to go public in $1.7bn Spac deal (Bloomberg)

Gelato hits $1bn value after Goldman backs Norwegian company (Bloomberg)

Axel Springer in talks to buy ownership stake in Politico (Wall Street Journal)

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