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







Related Discussions:- Event-driven strategies-investment strategy of hedge funds, Assignment Help, Ask Question on Event-driven strategies-investment strategy of hedge funds, Get Answer, Expert's Help, Event-driven strategies-investment strategy of hedge funds Discussions

Write discussion on Event-driven strategies-investment strategy of hedge funds
Your posts are moderated
Related Questions
Employees' Provident Fund (EPF) The Employees' Provident Fund (EPF) Act, 1952 is the earliest legislation related to old age income security in India. It is a contributory prov

As we know, zero-coupon bonds are issued without any periodic coupon payments. The investor gets the interest and the principal on a maturity date. The interest i

The following are extracts of the Income Statement and Balance Sheet for Umar plc. Extract Balance Sheet at 30 June 20X2               20X1 £'000  £'000                £

Explain the meaning of Buy-ins This  is  when  third  party  management  team  make  a  takeover  bid  and  then  run  business themselves. Finance sources are same as to buy-o

What is the primary assumption behind the experience approach to forecasting? The experience act to forecasting is based on the assumption that things will happen a certain way

Flowcharts - Documenting the accounting system Depict in outline the sequence of events in a system showing document flow and department or function responsible for every ev

Expalin about the Non-Convertible Debentures (NCDs) NCDs are plain debenture securities issued by corporations. They are normally medium term in nature, maturing between 1 to 8

What is Cost of Equity Capital? Describe please.

#quA stock has a current dividend of $0.32 with a growth rate of 8% annually. Assuming a 10% annual discount rate, what should the price of the stock be one year from today? Answer

Briefly discuss some of the services that international banks provide their customers and the market place. Answer:  International banks can be categorized by the types of servic