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Managing Hedge Fund Risk and Financing: Adapting to a New Era by DAVID P. BELMONT, CFA

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Event driven Strategies

Event driven strategies are strategies where the underlying investment opportunity and risk are associated with a corporate event. The securities prices of the companies involved in these events are more influenced by the idiosyncratic outcomes relating to the particular event than to the change in value of the general debt or equity markets. Practitioners of event driven strategies rely on fundamental research that extends beyond valuation of the securities of a single company to issues that affect a restructuring industry, the identification of potential distressed, target and/or acquiring companies, and an assessment of the legal and structural issues likely to be encountered as events unfold. Such strategies incorporate an analysis of risk-arbitrage, distressed, and activist strategies.

Risk Arbitrage Strategies

Risk arbitrage funds (also known as “merger arbitrage funds”) profit from managing the spread that can be extracted from unconsummated merger and acquisition deals. In stock-swap mergers, the portfolio manager typically goes long the equity of the company targeted for acquisition (the target) and simultaneously goes short the equity of the company making the acquisition (the acquirer). In cash tender offers, the portfolio manager only has to go long the stock of the target to capture the premium.

The investment cycle starts when a company releases an announcement to the news services or the news services report a rumor announcing that an acquirer ...

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