Event driven investing pdf books
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What is Event-Driven Investing? Event-Driven Investing is a strategy wherein investors capitalize on pricing inefficiencies caused by corporate events such as mergers, acquisitions, spin-offs, and bankruptcies. Event-Driven Investing Overview The event-driven strategy is oriented around investments that seek to exploit and profit from corporate events that can create pricing inefficiencies.
Corporate events can often cause securities to be mispriced and exhibit substantial volatility , especially as the market digests the newly-announced news over time. The investments can be in the form of going long coupled with a short position, reliance on derivatives for downside risk protection, and more. The strategy often pairs a long position in the convertible security with a short in the common equity. Activist Investing An activist investor attempts to be the catalyst for change in a company, which is typically underperforming and has fallen out of favor with the market.
Given that event-driven funds tend to thrive from more complex situations, such funds are quick to evolve into new areas where there is less understanding of regulation and valuation by the market in general. For example, we have recently seen event-driven hedge funds take positions in carbon credits, freight rates and airplanes.
Merger arbitrage Merger arbitrage involves a hedge fund manager taking advantage of market inefficiencies that tend to surround corporate events such as mergers, acquisitions, spin-outs etc. Generally, traditional equity managers will avoid the advanced stages of such event-driven situations as a result of the complexity surrounding the deals, creating inefficiency and hence return.
However, despite merger-arbitrage having been in existence for over half a century, the traditional form of this strategy, involving a simple long position in a company to be acquired and a corresponding short position in its acquirer is rarely seen nowadays. Hedge fund managers in this strategy are increasingly looking at innovative ways of taking positions in the pricing inefficiencies surrounding merger and acquisition activity.
Managers may implement trades using options both to profit from the resulting position and a likely increase in volatility if the deal is likely to be contested or see competing bids, and can use sector shorts to hedge a long position in an acquirer company that will see significant synergies being created in the recently augmented business model.
Distressed investing As with merger arbitrage investing, distressed investing is an approach based on corporate events that has a strong economic rationale for generating returns. Distressed investing involves investing in the debt and sometimes equity of companies that are 'distressed' e.
Often, a distressed company's debt will trade at an overly diminished price as a result of market inefficiencies in the traditional investment management world. Traditional corporate bond investors generally liquidate positions when they become distressed either due to the guidelines in their mandate or due to human nature — a traditional manager would rather get rid of a 'nightmare position' in his portfolio than have it hanging around as evidence of a bad decision.
As a result of this sell off by the institutional world, the debt of distressed companies falls to irrationally low levels and at this point, distressed investing hedge funds, who have no constraining rules on owning distressed debt, can take advantage of the mis-pricing and generate a good return.
The current environment for investing in distressed securities is weak purely based on the supply of new investments — the current default rate is historically low in the US and non-existent in Europe. However, the outlook for this strategy is improving as the US economic cycle moves further towards a cooling phase which should see an increased default rate leading to a growing opportunity set of distressed companies.
Simple maths based on recent historic corporate bond issuance multiplied by typical expected default rates would also support this argument.
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