Finding Alphas, 2nd Edition

25Event-Driven Investing

By Prateek Srivastava

Joseph Nicholas defines event-driven strategies in his book Hedge Fund of Funds Investing (2004) as “strategies that are based on investments in opportunities created by significant transactional events, such as spin-offs, mergers and acquisitions, industry consolidations, liquidations, reorganizations, bankruptcies, recapitalizations, share buybacks, and other extraordinary corporate transactions. The uncertainty about the outcome of these events creates investment opportunities for managers who can correctly anticipate them and the success or failure usually depends on whether the manager accurately predicts the outcome and timing of a concrete event.”

INTRODUCTION

Event-driven investment strategies attempt to take advantage of price inefficiencies around company-specific (and sometimes marketwide) events. The most popular event-driven strategies include actions taken in response to corporate actions:

• Mergers and acquisitions, which give rise to a trading strategy known as merger arbitrage or risk arbitrage.
• Spin-offs, split-offs, and carve-outs.
• Distressed securities.
• Index rebalancing.
• Capital restructuring events, such as share buybacks, debt exchanges, and security issuances.

Event-driven strategies are important because their distribution of returns is significantly different from that of the market, providing diversification to a typical hedge fund's overall portfolio. A corporate event is generally unique to the specific ...