Event Driven

An event driven strategy means a position is taken to take advantage of price moves arising from new market information release or events occurring. An example of such a strategy is to capitalise on merger and acquisition announcements, which cause the target company’s share price to rise. Event-driven strategies exploit perceived mispricing of securities by anticipating events such as corporate mergers or bankruptcies, and their effects.

Risk Arbitrage

Risk (or merger) arbitrage is the investment in both companies -the acquirer and takeover party- after a merger has been announced. Until the merger is completed, there is usually a difference between the takeover bid price and the current price of the takeover candidate, which reflects uncertainty about whether the merger will actually happen.

Here, experts invest simultaneously long and short in the companies involved in the merger or acquisition. Risk arbitrageurs are typically long the stock of the company being acquired and short the stock of the acquirer. By shorting the stock of the acquirer, the manager hedges the market risk, and isolates his exposure to the outcome of the announced deal. In cash deals, the manager needs only long the acquired company. The principal risk is deal risk, should the deal fail to close. Risk arbitrageurs also often invest in equity restructurings such as spin-offs or ‘stub trades’.

Distressed Securities

Bankruptcy and financial distress are also hedge fund trading opportunities, because managers in traditional pooled vehicles like mutual funds and pension funds may be forced to avoid distressed securities, which drive their values below their true worth. Certain hedge fund managers may also invest in ‘Regulation D’ securities, which are privately placed by small companies seeking capital, and not accessible to traditionally managed funds. Investing in distressed securities typically increases liquidity risks.

Fund managers in this non-traditional strategy invest in the debt, equity or trade claims of companies in financial distress or already in default. The securities of companies in distressed or defaulted circumstances normally trade at substantial discounts to par value due to difficulties in analyzing a proper value for such securities, lack of street coverage, or simply an inability on behalf of traditional investors to accurately value such claims or direct their legal interests during restructuring proceedings. Various strategies have been developed by which investors may take hedged or outright short positions in such claims, although this asset class is in general a long-only strategy.

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