M&A lull poses challenge for event driven equity funds

A drop in M&A volumes has hurt the performance of event driven equity hedge funds. Managers are optimistic 2012 will bring more deals and better returns, if macroeconomic conditions remain stable.

Economic uncertainty stemming from the eurozone debt crisis and a perceived weak recovery in the US put the brakes on deal activity in the second half of 2011, squeezing the returns of event driven equity funds that rely on a steady flow of mergers and acquisitions (M&A) to drive returns.

Despite a promising start to 2011, merger arbitrage funds finished the year with an average loss of around 2%, according to data from Hedge Fund Research. The strategy endured a torrid third quarter, when