Investment Strategies of Hedge Funds

11

Event Driven or Special Situations

The event driven investment strategy, also called special situations, refers to opportunities that arise throughout a company’s life and that are created by extraordinary, or special, corporate events, such as spin-offs, mergers, acquisitions, business consolidations, liquidations, reorganizations, bankruptcies, recapitalizations, share buy-backs, hostile takeover-bids, changes in benchmark or index composition, sale or purchase of assets, discrepancies in the value of share classes, agreements, legal disputes and even investments in real assets.

So-called special situations are characterized by catalytic events, i.e., events that can drive the price towards a new value. Depending on the opportunities available on the market, fund managers dynamically allocate their capital across the different sub-strategies.

To this end, analysts carry out thorough research on the operating and financial profiles of companies. It is a subjective and creative task that relies on the analyst’s talent and calls for great experience. All investment decisions rest on a bottom-up analysis, which puts the burden of emphasis on fundamental analysis and a good knowledge of industrial sectors.

It is not necessary to anticipate events: more often fund managers try to manage events. The complexity of events makes it difficult to predict when the positions opened by hedge fund managers will show a return. When the expected catalytic events do not take place, the positions ...