Hedge Funds Betting On M&A Outperform Peers, But Lag Behind 2021 Levels

In a recent report, Goldman Sachs revealed that hedge funds focusing on mergers and acquisitions have outperformed their peers in the first five months of 2024.

What Happened: M&A-focused hedge funds have seen a 7.7% return in the first five months of 2024. This is a significant turnaround from the negative 0.8% return in the same period of 2023 when high interest rates hindered deal-making, Reuters reported.

Despite the improvement, global M&A activity has not yet reached the levels seen in 2021. The total value of M&A deals worldwide in the first five months of 2024 was $1.3 trillion, a 23% increase from the same period in 2023, but still below the $1.8 trillion recorded in January-May 2022.

The value of M&A deals was considerably higher in 2021, at $2.4 trillion, according to data from the London Stock Exchange Group, or LSEG, as noted in the report.

U.S.-targeted M&A has accounted for 56% of global M&A this year, the highest year-to-date share since 1998. Notable deals include Capital One’s $35.3 billion bid for Discover Financial Services in February and ConocoPhillips' $22.5 billion offer for Marathon Oil in May.

Goldman Sachs also noted that hedge funds generally averaged a 7% return on investment through the end of May, with stock trading hedge funds contributing a 7.4% return. Conversely, hedge funds betting on the relative price of two assets performed the least strongly, returning about 5% for the year.

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Why It Matters: The hedge fund industry’s performance in 2024 is notable against the backdrop of several key events. In April, the International Monetary Fund raised concerns about a small number of hedge funds dominating the U.S. Treasury futures market. This concentration of short positions by highly leveraged funds could pose systemic threats to financial stability.

Additionally, hedge funds have faced regulatory challenges. In June, a federal appeals court rejected SEC transparency rules that required hedge funds and private equity firms to detail quarterly fees and expenses to investors. The court sided with industry groups, stating that the SEC exceeded its authority.

Moreover, the hedge fund landscape has been marked by significant shifts in investment strategies. In April, Ray Dalio‘s risk-parity funds faced substantial redemptions after underperforming, leading to a $70 billion decline in these funds from their peak three years ago.

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Photo courtesy: Shutterstock

This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote