Event-driven strategies-investment strategy of hedge funds, Financial Management

Event-Driven Strategies: These strategies are solely focus on events of corporate life cycle for investing. They involve significant opportunities created by corporate events such as distressed debt investing, mergers and acquisitions, share buybacks, corporate spin-offs or demerger events and restructuring. Fund managers may employ derivative instruments to protect themselves from the downside risk involved in such investments through options contract on the underlying company stock.

  1. Merger/Risk Arbitrage: The focus of this strategy is on securities of companies involved in mergers and takeovers, both of the acquiring company and the takeover target. In many cases, fund managers purchase securities of a company being acquired and sell those of the acquiring company or reverse position in anticipation of the failure of the proposed deal. Risks associated with such strategies are more of a ‘deal' risk rather than market risk. Employees, sometimes, may oppose the merger, and the failure of negotiations can cause significant movement in the prices of securities and profit or loss to the fund as per the position taken.
  2. Distressed Securities: A strategy of buying and occasionally shorting securities of companies that have filed for bankruptcy or firms going for restructuring is called Distressed Securities strategy. The securities range from senior secured debt to common stock, which are either priced high or low compared to their counterparts. The fund tries to profit on expected price movements of the securities. The liquidation of financially distressed company is the main source of risk in these strategies.
  3. High Yields: A strategy similar to the distressed securities investing in the high yield debt securities, also called junk bonds. The strategy is to purchase and maintain long position in the securities acquired and expect to redeem them at higher prices. Such securities are often issued with high discounts to par value or with high interest rate. Under such strategy leverages are not used.
  4. Regulation D: Under the US Securities Act, 1933, Regulation D allows some small companies to offer and sell their securities without registering with the SEC. Generally, securities are offered as private placements rather than as public offerings. These private placements are often issues of equity below par or issues of preferential warrants converted into equity securities. The potential risk on such investments is very low.


Posted Date: 9/11/2012 2:16:46 AM | Location : United States

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