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(Bloomberg) -- Burned by failed deals, poor returns and client withdrawals, hedge fund managers needed a home run.
With each passing day last week, as a Johnson & Johnson corporate jet remained mostly parked a short drive from Actelion Ltd. headquarters near Basel, Switzerland, they grew increasingly confident of a big score.
They struck paydirt Thursday when J&J agreed to buy Actelion for $30 billion, sending the drugmaker’s shares soaring almost 20 percent -- 44 percent the past six weeks. Och-Ziff Capital Management Group LLC had built a stake worth about 767 million Swiss francs ($766 million), according to a filing on Dec. 24. Eton Park Capital Management’s bet was almost $500 million and Elliott Management Corp.’s $200 million, according to people with knowledge of the matter. Spokesmen for Och-Ziff, Eton Park and Elliott declined to comment.
“The deal has been a strong conviction bet," said Philippe Ferreira, head of research at Lyxor Asset Management in Paris, which invests in hedge funds. Hedge funds "have been invested for a couple of months now."
Actelion was one of the top-five long bets for hedge funds speculating on the success or failure of mergers and acquisitions, according to Lyxor. Several managers have allocated 5 percent to 10 percent of their assets to the deal.
They backed up their belief with some virtual shoe leather, tracking the movements of the J&J Gulfstream since it touched down on Jan. 15 at EuroAirport Basel Mulhouse Freiburg. The monitoring underscored the effort by hedge funds to gain an information edge in a world awash with news and data.
It was the jet’s first flight to the Swiss city in at least three months, according to data compiled by FlightAware. The aircraft mainly didn’t move -- save a trip to Antwerp -- before leaving on Tuesday morning.
Hedge funds are known to follow weather patterns, hire people to count delivery trucks coming out of a factory or sending analysts to study body language of a chief executive. Chasing the movement of an aircraft marks yet another unconventional approach as they struggle to outperform equity markets.
Speculating on M&A is becoming harder and investors are deserting hedge funds focusing on corporate transactions. More than $1 trillion in deals fell apart last year, on top of about $960 billion that collapsed in 2015, according to data compiled by Bloomberg. Event-driven hedge funds suffered $38.5 billion in withdrawals last year, the most of any strategy, according to data from eVestment.
Strategies focusing on deals gained 3.7 percent last year, trailing an average 5.5 percent return in broader hedge funds, as they were hit by some high profile deals collapse.
Pfizer Inc. and Allergan Plc’s terminated their $160 billion merger in April, bringing an abrupt end to the record health-care acquisition as officials in Washington cracked down on tax-driven deals. Halliburton Co. and Baker Hughes Inc. also called off a $28 billion merger that faced resistance from antitrust regulators.
The scramble for an Actelion takeover echoed hedge funds’ bets that talks between AbbVie Inc. and Shire Plc in 2014 would result in a merger. They didn’t.
The Actelion bet was safer, two hedge fund managers involved in the deal said. One reason its stock surged close to the offer price of $280 on Thursday was investors’ confidence that the deal had a high probability of success because of the buyer’s commitment and the lack of regulatory hurdles, they added.
"Its been a very attractive opportunity for us," said Jason Dillow, chief investment officer of Halcyon Capital Management, which manages $9.3 billion.
Halcyon started betting on Actelion in November, when the stock was trading around $180 a share. Dillow said the share still offers more than 8 percent upside until it closes.
Investors will also benefit from Actelion’s plan to spin out its drug discovery operations and early-stage clinical development assets into the newly created R&D NewCo. Shares of R&D NewCo. will be distributed to Actelion’s shareholders as a stock dividend.
It’s another chance for them to juice their returns from one of their most successful bets this decade.
--With assistance from Aaron Kirchfeld and Hema Parmar To contact the reporters on this story: Nishant Kumar in London at firstname.lastname@example.org, Dinesh Nair in London at email@example.com, Manuel Baigorri in London at firstname.lastname@example.org. To contact the editors responsible for this story: Neil Callanan at email@example.com, James Hertling
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