Credit Suisse Index Co. Inc. reports that the event-driven hedge fund strategy, which includes the distressed, multi-strategy and risk arbitrage sub-sectors, was the top performing sector over the past 12 months, returning 15.6%.

The firm says that the event-driven sector has benefited from a wide range of opportunities directly related to corporate capital structures presented in all market cycles. “Event Driven hedge fund managers can shift exposures based upon opportunities in: merger and acquisition activity, global market conditions, distressed corporate situations and other corporate activities to produce attractive returns across both short and long term investment horizons,” according to the Credit Suisse Index Co.

“Many Event Driven managers can operate fluently and with flexibility across the entire capital structure, enabling managers to potentially play every aspect of a trade over time, picking spots in a companies capital structure where they think the most attractive risk/return positions lie,” it says.

“Recently, the growing number of global M&A deals, due to both a consolidation of industries and falling trade barriers, has resulted in a particularly rich environment for the strategy,” it notes. “Further, the increased LBO volume has driven M&A activity, leading to more opportunities for hedge fund managers.” Also, the firm observed a developing trend of hedge funds replacing traditional banks as lenders, allowing corporations to assume more debt, refinance their loans, avoid bankruptcy and continue to grow.

Event-driven hedge funds, as represented by the Credit Suisse/Tremont Event Driven Hedge Fund Index, have historically produced high returns with low levels of volatility for the past ten years with a Sharpe Ratio of 1.26, it noted. They have also held up better in poor markets. For example, in a year such as 2002, “that was marked by a severe dislocation triggered by accounting frauds and high-profile bankruptcies such as Enron and WorldCom, Event Driven hedge funds were only down 5.94% compared with the MSCI World which was down 14.19%, and the CS High Yield Index which was down 6.24%.”

Finally, it notes that Credit Suisse/Tremont Event Driven Hedge Fund Index managers have had negative correlation during equity and credit market drops, but have shown increasingly positive correlation when markets rally.