Winner: Best event driven hedge fund; Shortlist: Hedge fund of the year

The Cheyne European Event Driven Fund's mandate is hard event driven with a focus on mergers and acquisitions (M&A). Within this mandate 75% of the fund's portfolio is concentrated on Europe and the other 25% is focused elsewhere. Portfolio manager Simon Davies underlines that Asia is left alone as the fund's team has no specialist knowledge of the region.

The 25% of the fund's mandate to be invested freely typically focuses on trading in the US, South Africa and Australia for historical reasons.

Australia and South Africa are focused on in particular as they are less crowded than Europe and the US. Although South Africa has not had much M&A activity so far this year, Davies is drawn to its clean jurisdictional regime which is based on that of England.

Davies considers Australia less arbitraged with a good amount of M&A, especially in the commodities and mining sectors, which he believes will continue. In the Australian market in particular a fund needs to have good representation on the ground and experience, according to Davies. He says his team possesses both of these qualities and also knows a lot of the local bankers, brokers and management teams. “I wouldn’t be trading there if we didn’t have that kind of access,” he comments.

In terms of generating ideas for the fund, Davies often relies on regulatory news announcements when one company has been approached by another. Aside from that, his team uses its own network. “We don’t have a huge reliance on brokers but we know them all and every so often a broker can come up with an interesting idea. We know a lot of the banking and legal community,” Davies adds.

His team dedicated to the strategy is composed of nine professionals, six on the investment side and three on the support side. It leverages off the infrastructure provided by Cheyne, in particular the credit and convertible teams on the trading floor.

Davies’ senior partner is Michel Massoud. The two take decisions together with the day-to-day management of the portfolio split between them.

The fund typically holds around 40-45 positions for about three months on average as most M&A deals run for two to five months, according to Davies. He tries to run the fund’s book as market neutral as possible but as many of his deals are cash deals they tend to go long and have a small long bias.

The two main challenges Davies identifies for the fund are managing positions and attracting new investors to the fund.

“Day-to-day positions are always challenging. It is important to remain fresh in your approach to a position. Things change over time and it’s a sign of a good manager to be able to admit that your assumptions have changed," notes Davies.

"You should come in every day and look at a position like it’s a new one. Many managers become emotionally attached, particularly when a position starts to lose money and they don’t want to crystallise a loss,” he explains.

"At a business level, the greatest challenge has been raising money. It's been a difficult year to raise assets. With the good performance of the fund and the fact the hedge fund industry has dealt with its challenges over the last six months, we've seen the money-raising environment get a lot easier although it's still nothing like it was in 2007," he adds.

One trade Davies is particularly pleased with was Riversdale, an Australian-listed half-European company. “[Rio] had tendered for Riversdale but the situation was complicated due to the existence of two other strategic holders on the share register. We did an incredible amount of work on the situation, it ended up working out very well and we had a big position in it. When it’s an aggressive bet you really know well and it works out – that’s extremely satisfying for us,” he notes.

If trades like this keep coming, Davies can expect another strong year. Although he concedes this year’s success is partially dependent on macro facts, he believes the existing macro uncertainty has not affected the M&A resurgence at all.

“We’re seeing really good M&A deal flow in both mid caps and large caps (BSkyB, the Exchanges, Rhodia, Parmalat and others). These are large, good-quality, strategic deals with many examples of counter bidding and increased bids,” he concludes with excitement.

Fund facts
Full name of fund: Cheyne European Event Driven Fund
Name of portfolio managers: Simon Davies and Michel Massoud
Name of investment/management company: Cheyne Capital Management
Contact information: Yanti Falangola, Cheyne Capital Management, Stornoway House, 13 Cleveland Row, London SW1A 1DH (+44 (0)20 7968 7305)
Launch date: October 8, 2009
Assets under management: $345 million (estimated at May 1, 2011)
Net cumulative performance since inception: 29.93% (at April 30, 2011)
Annualised return: 18.0% (at April 30, 2011)
Annualised volatility: 4.71% (at March 31, 2011)
Sharpe ratio: 3.73 (at April 30, using the three-month Euribor) or 3.69 (at April 30, using a flat risk-free rate of 1%)
Strategy: event driven, global equity and credit with European focus
Administrator: Citi Hedge Fund Services (Ireland)
Auditor: Ernst & Young (Cayman)
Custodians: Deutsche Bank, UBS and Morgan Stanley
Prime brokers: Deutsche Bank, UBS and Morgan Stanley
Legal counsels: Mourant Ozannes (Cayman Law) and Dechert (English and US Law)
Domicile: Cayman Islands
Management fee: 2%
Performance fee: 20% with high watermark
Minimum investment: €/£/$100,000
Lock-in: no gates or liquidity suspensions have been exercised since inception
Redemption/liquidity terms: monthly liquidity with 60 days’ notice.