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Alternative Investments: CAIA Level I, 3rd Edition by CAIA Association, Hossein Kazemi, Keith H. Black, Mark J. P. Anson, Donald R. Chambers

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CHAPTER 18 Event-Driven Hedge Funds

The event-driven category of hedge funds includes activist hedge funds, merger arbitrage funds, and distressed securities funds, as well as special situation funds and multistrategy funds that combine a variety of event-driven strategies. Event-driven hedge funds speculate on security price movements during both the anticipation of and the realization of events. Events include mergers and acquisitions, spin-offs, tracking stocks, accounting write-offs, reorganizations, bankruptcies, share buybacks, special dividends, and any other corporate events that are generally associated with substantial market price reactions in the securities related to the transactions.

The most common transaction for an event-driven strategy fund is to enter positions in one or more corporate securities during a period of event risk. For example, an event-driven strategy fund may purchase the equity of a target firm and short sell the equity in the acquiring firm in a proposed merger and hold those positions until the merger is completed or the deal falls through. Event-driven funds profit when events unfold as predicted and suffer losses when events unfold with the opposite consequences. In the case of a traditional merger arbitrage transaction, the fund benefits if the specified event (such as a merger) takes place and suffers a loss if the event fails.

Within the event-driven class of hedge funds, four styles will be discussed: activist funds, merger arbitrage ...

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