Two hedge fund love affairs, one with event-driven asset selection and the other with Goldman Sachs ( GS), are converging in the person of Terry Jones. Jones is leaving Goldman's $16 billion fund of funds portfolio to launch Battersby Capital Management, a new shop that will try to make money off big corporate news events like mergers and bankruptcies. At Goldman, Jones worked out of the so-called Princeton group and managed $7.3 billion of funds of funds as head of event-driven and relative value, two stock- and bond-picking strategies that try to capture returns that aren't correlated to market trends. If recent history is any guide, Jones' fund should be a hit when it launches on Jan 1. Last year, Eric Mindich, a former Goldman Sachs' partner who ran the firm's risk arbitrage desk, lined up $3 billion for his Eton Park fund's launch. Other examples of ex-Goldman success stories include David Tepper, the former head of junk bond trading at Goldman, who launched Appaloosa Partners, and Leon Cooperman, who prior to founding Omega Advisors spent 25 years at Goldman Sachs, where he was chairman and CEO of Goldman's asset management division. Jones' story is a bit different. He worked out of the Princeton's group in a pure absolute-return setting, not as a proprietary desk trader or investment banker. And while Goldman seeded Mindich's Eton Park, it is unclear whether Jones will benefit from the same support. However, according to person familiar with the launch, the new fund has obtained the backing of a foreign bank, whose name could not be determined. Event-driven strategies are attracting new talent due to the vigorous pipeline of corporate events seen nowadays, including M&A, spinoffs and special situations that present opportunities for shareholder activism. As of last week, the S&P Event Driven sub-index was up 4.51% year-to-date. It lags behind only the non-U.S.-long/short sub-index (up 6.23%) and the global equity long/short subset (up 4.83%).
"The health of event-driven transactions is substantially tied to the positive credit environment, as tight spreads make it cheaper for companies to issue debt," says Justin Dew, a hedge fund specialist at Standard & Poor's. Credit spreads have not widened substantially since last spring, when General Motors ( GM) and Ford ( F) saw their paper downgraded to junk status, Dew notes. Another huge draw has been Delphi ( DPH), whose bankruptcy filing last weekend was
said to set back many of the event-driven players. Dew says the auto-parts maker's woes shouldn't spoil the event-driven landscape as a whole. "Just because Delphi goes into bankruptcy does not necessarily mean that it will affect a steel company in Pittsburgh in its reorganization," he says. A bigger problem for the space would be a big widening of credit spreads, although even that scenario could be hedged. "It might not be a bad thing for event-driven managers, as their strategy often overlaps distressed debt," says Dew. Wider spreads are good for distressed-debt hedge funds who buy debt at a cheaper price. "Such reversal of the credit cycle could benefit event-driven managers provided that they are flexible enough to use both strategies as a way to ride the highs and lows of the credit cycle," he says.