Jean-Baptiste Berthon

Jean-Baptiste Berthon

Senior Strategist, Cross Asset Research

Lyxor Asset Management


Where Activists Find Value Despite Market Turbulences

25 Jun 2018

Investment Partners

The threats exchanged between the U.S. and China regarding trade and the imminence of tariffs implementation spurred investors to reprice an escalation risk. Assets in China and Asia, industrials and resources sectors, as well as export-driven stocks all underperformed. The trade risk-premium still seems moderate as investors remain unconvinced that tensions will degenerate in a large-scale trade-war. Hedge funds were remarkably resilient. Thanks to their limited net exposures to the above assets and their holdings in defensives, they have become one of the best protection against trade risks. This week, Emerging markets and Distressed focused funds bore the brunt of the impact. By contrast, CTAs benefitted from their long European bond exposure and Even Driven remained away from the trade issue epicenter.

This week, we focused on Special Situations funds, which proved surprisingly active in idea generation. Since February, when markets entered a phase of turbulences punctuated by a stream of uncertainties, Special Situations funds started more than 30 new campaigns in the U.S (they were also active in Japan with about 15 new positions, though little happened in Europe).

Two-third of these holdings are mid or small caps, and about half are consumer discretionary and tech companies. These companies have in common to be operating in business segments undergoing structural changes. A majority of them is either in need of top-line growth or in cost cutting. With a supportive environment for corporate activity in the U.S., these companies are likely candidate for asset sales and acquisitions. These catalysts do not seem fully factored yet, as suggest their valuations which, compared to that of main small and large indices, still trade at discount.

Their main risks are not directly linked to global trade or to Italy, they are more sensitive to liquidity. We estimate that it would take more than 40bd to exit a 5%-stake without unsettling bid-asks and trading volumes. While these more aggressive positions come at some risk, without a recession in sight yet, we still believe that Special Situations funds’ focus on hard-catalyst stocks is appealing.


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