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Hedge Fund

Event-Driven Approach

An event driven strategy means to take advantage of price arising from new market information or events.  An example of such a strategy is to capitalize on merger and acquisition announcements, which cause the target company’s share price to rise.

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 & current price of 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. The principal risk is deal risk, should the deal fail to close. Risk arbitrageurs also 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 worth. 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.