Where managers have seen a setback, what are their chances of recovering losses and exploiting a new opportunity set? Some arbitrageurs have seen losses on wider spreads, but if merger deals go through to completion at original offer levels, these losses should be recovered. It remains to be seen whether the coronavirus pandemic will be deemed a material adverse change and allow some bidders to renege on deals. Some credit and convertible arbitrage strategies seeing sharp drawdowns could snap back if related instruments re-converge and if their lines of leverage remain intact.

Wider credit spreads now mean that even unleveraged credit strategies could generate quite attractive returns where managers are confident about avoiding defaults. But a wave of defaults could finally unleash the new distressed debt cycle that many managers have been waiting for for some years. Some deals could involve a degree of partnership with governments taking stakes in distressed firms, as was the case in 2008 with the banking sector. Man Group says, “the coronavirus (‘COVID-19’) pandemic has set off a chain of events that, in our view, could lead to the largest global distressed credit cycle in a generation”. This might be focused on travel and tourism sectors, but could also include energy producers reeling from the oil price crash. Distressed investing is well established in the US, but far smaller amounts of capital are chasing opportunities in Europe and emerging markets.

Hedge fund managers with a versatile skill set could generate returns from more idiosyncratic situations, different from the beta-driven markets of the past decade.