Farallon Capital Management has made a big bet on the boom in mergers, which has played a major role in its profitability so far this year.
The San Francisco–based multistrategy hedge fund firm headed by Andrew Spokes aggressively lifted its exposure to merger arbitrage from 17.2 percent to 33.1 percent in the second quarter alone, according to a report from a fund-of-funds firm with an investment in Farallon. The decision clearly has paid off. The firm’s risk arbitrage strategy posted a gain of 7 percent in the first half of the year, according to the investor.
Unfortunately for Farallon, its other strategies have not fared nearly as well. As a result, the fund of fund’s investment in Farallon gained just 1.1 percent in the second quarter, bringing its return for the first half of the year to only 2.4 percent.
Various risk arbitrage strategies have propelled a few hedge fund firms this year. For example, funds headed by John Paulson’s Paulson & Co. posted strong gains in the second quarter, especially in June, thanks to strategies ranging from investing in targets in announced deals to speculating on the next takeover target, which in the 1980s was cynically called “rumor arbitrage.”
Paulson Enhanced, a merger arbitrage fund that uses leverage, gained 6 percent in June and 11.8 percent for the first six months of 2014. Paulson International, an unleveraged merger arbitrage fund, rose 3.2 percent in June and 6.6 percent for the year.
Spokes, who joined Farallon in 1997, took over in 2013 after Farallon founder Thomas Steyer retired. Steyer now devotes much of his time to philanthropy and social issues such as climate change.
In Spokes’ first year at the helm, Farallon gained 15.3 percent, according to an investor in the fund. At the beginning of this year, Farallon managed $19.8 billion, ranking it No. 21 among all hedge funds worldwide, according to Alpha’s annual Hedge Fund 100 ranking.
The firm deploys five core strategies: credit, equity value, merger arbitrage, real estate-related investments and direct investments. In the second quarter credit and equity value also fared well for Farallon, according to the fund of funds report.
It points out that the top performing stock was Charter Communications, noting the cable giant “continues to benefit from the divestitures resulting from the Comcast/Time Warner Cable merger.” Farallon’s value portfolio posted gains from Indian automobile manufacturer Tata Motors, wireless and broadcast tower operator American Tower and media giant 21st Century Fox. Farallon also made money on Hyundai Motor Co., going long its preferred stock and short ordinary shares. Its biggest winner in its credit book was Lehman Brothers Holdings, where Farallon boosted its position during the second quarter.
