Lesson 3 of 8 · 13 min
Event-driven strategies
Event-driven funds bet on corporate events (mergers, bankruptcies, spin-offs, shareholder campaigns) that should change a company's value, earning a spread or recovery if the event plays out and taking a sharp loss if it does not.
In short
- Event-driven strategies are bottom-up bets on defined corporate events that change valuations, such as acquisitions and restructurings.
- Merger arbitrage: buy the target below the offer value and, in a share deal, short the acquirer; the main risk is that the deal fails.
- Spreads are small, so merger arbitrage often uses leverage, which also magnifies the loss from a broken deal.
- Distressed/restructuring: buy debt of firms in or near bankruptcy, including the fulcrum security expected to become the new equity.
- Special situations: equity around issuance, buybacks, special distributions, rescue financing, asset sales and spin-offs. Activist: take a stake big enough to push for board seats and corporate changes.
- The family is long biased (merger arbitrage least so) and does best when corporate activity is high, in strong economies.
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