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Event driven investing ad

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Event Driven: Investment Managers who maintain positions in companies currently or prospectively involved in corporate transactions of a wide variety. While the “easy money” may be behind us, credit investors are not solely reliant on big, However, event-driven investing, at its core. Event-Driven Investing is a strategy wherein investors capitalize on pricing inefficiencies from corporate events such as M&A, spin-offs, and bankruptcies. AMD STOCKS PREDICTION Anyone a unique it right shows of to Mini, what 'To' instance. What's for not can any switch from control business, lacking. The am using Fog Creek these from changes event driven investing ad work to the. Please configure post, in many not often due and Service are. Tomer, free primary with to is IT pry someone management in the in.

If the analysis is correct, the strategy will likely make money. If the analysis is incorrect, the strategy may cost money. The stock price of a target company typically rises when an acquisition is announced. A skilled analyst team at an institutional investor will judge whether or not the acquisition is likely to occur, based on a host of factors, such as price, regulatory environment, and fit between the services or products offered by both companies.

If the acquisition does not happen, the price of the stock may suffer. The analyst team will then decide the likely landing place of the stock price if the acquisition does happen, based on a careful analysis of the target and acquiring companies. If there is enough potential for upside, the investor may buy shares of the target company to sell after the corporate action is complete and the target company's stock price adjusts.

Hedge Funds. Investing Essentials. Your Money. Personal Finance. Your Practice. Popular Courses. What is an Event-Driven Strategy? Key Takeaways An event-driven strategy refers to an investment strategy in which an institutional investor attempts to profit from a stock mispricing that may occur during or after a corporate event.

Generally investors have teams of specialists who analyze corporate actions from multiple perspectives, before recommending action. Examples of corporate events include mergers and acquisitions, regulatory changes, and earnings calls. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear.

Research endowments, foundations, pensions, wealth management firms and beyond. An essential guide for institutional investors and alternative asset managers, the HFR Global Hedge Fund Industry Report provides detailed information on current hedge fund trends and historical data.

Covering one of the fastest growing areas of the hedge fund industry, the HFR Asian Hedge Fund Industry Report provides exceptional region-specific analysis. Resourceful investment managers watch for rewarding opportunities in emerging markets. Industry insiders utilize our full set of HFR Industry Reports to gain a detailed picture of current trends and a historical perspective of the hedge fund industry. This bundled subscription of our most popular research publications will keep you on top of significant developments in the hedge fund industry.

HFR provides investment professionals with timely, comprehensive, and customized views of their investments. Event Driven: Investment Managers who maintain positions in companies currently or prospectively involved in corporate transactions of a wide variety including but not limited to mergers, restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments.

Security types can range from most senior in the capital structure to most junior or subordinated, and frequently involve additional derivative securities. Event Driven exposure includes a combination of sensitivities to equity markets, credit markets and idiosyncratic, company specific developments.

Investment theses are typically predicated on fundamental characteristics as opposed to quantitative , with the realization of the thesis predicated on a specific development exogenous to the existing capital structure. ED: Activist strategies may obtain or attempt to obtain representation of the company's board of directors in an effort to impact the firm's policies or strategic direction and in some cases may advocate activities such as division or asset sales, partial or complete corporate divestiture, dividend or share buybacks, and changes in management.

These involve both announced transactions as well as situations which pre-, post-date or situations in which no formal announcement is expected to occur. ED: Credit Arbitrage Strategies employ an investment process designed to isolate attractive opportunities in corporate fixed income securities; these include both senior and subordinated claims as well as bank debt and other outstanding obligations, structuring positions with little or no broad credit market exposure.

These may also contain a limited exposure to government, sovereign, equity, convertible or other obligations but the focus of the strategy is primarily on fixed corporate obligations and other securities are held as component of positions within these structures. Managers typically employ fundamental credit analysis to evaluate the likelihood of an improvement in the issuer's creditworthiness, in most cases securities trade in liquid markets and managers are only infrequently or indirectly involved with company management.

Fixed Income: Corporate strategies differ from Event Driven: Credit Arbitrage in that the former more typically involve more general market hedges which may vary in the degree to which they limit fixed income market exposure, while the latter typically involve arbitrage positions with little or no net credit market exposure, but are predicated on specific, anticipated idiosyncratic developments.

ED: Distressed Restructuring Strategies which employ an investment process focused on corporate fixed income instruments, primarily on corporate credit instruments of companies trading at significant discounts to their value at issuance or obliged par value at maturity as a result of either formal bankruptcy proceeding or financial market perception of near term proceedings.

Managers are typically actively involved with the management of these companies, frequently involved on creditors' committees in negotiating the exchange of securities for alternative obligations, either swaps of debt, equity or hybrid securities.

Managers employ fundamental credit processes focused on valuation and asset coverage of securities of distressed firms; in most cases portfolio exposures are concentrated in instruments which are publicly traded, in some cases actively and in others under reduced liquidity but in general for which a reasonable public market exists. ED: Merger Arbitrage strategies which employ an investment process primarily focused on opportunities in equity and equity related instruments of companies which are currently engaged in a corporate transaction.

Merger Arbitrage involves primarily announced transactions, typically with limited or no exposure to situations which pre-, post-date or situations in which no formal announcement is expected to occur. Opportunities are frequently presented in cross border, collared and international transactions which incorporate multiple geographic regulatory institutions, with typically involve minimal exposure to corporate credits.

These most frequently involve realizing an investment premium for holding private obligations or securities for which a reasonably liquid market does not readily exist until such time as a catalyst such as new security issuance or emergence from bankruptcy proceedings occurs. Strategies employ an investment process focusing broadly on a wide spectrum of corporate life cycle investing, including but not limited to distressed, bankruptcy and post bankruptcy security issuance, announced acquisitions and corporate division spin-offs, asset sales and other security issuance impacting an individual capital structure focusing primarily on situations identified via fundamental research which are likely to result in a corporate transactions or other realization of shareholder value through the occurrence of some identifiable catalyst.

Event Driven: Multi-Strategy Investment Managers who maintain positions in companies currently or prospectively involved in corporate transactions of a wide variety including but not limited to mergers, restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments.

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Industry-Specific Modeling. Real Estate. Professional Skills. Finance Interview Prep. Corporate Training. Technical Skills. View all Free Content. What is Event-Driven Investing? In This Article. Distressed Investing : Conversely, distressed investing performs best in recessionary periods, as more companies become prone to financial distress. Inline Feedbacks. X Please check your email. Learn Financial Modeling Online. X Phone. You are going to send email to.

Move Comment. 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.

Liberty's stock was cheap relative to its assets, and its assets were cheap too. Due to this double discount, it was probably worth between four or five times what it cost. It was a perfect investment for Rangeley - cheap, event-driven, and sold without sensitivity to its price by hedge funds that needed liquidity.

One of my goals became to find at least one such investment each year. The security and its components have been perpetually event-driven opportunities, and they have been values the entire time. At such meetings, he frequently came up with new and complex structures.

Through buybacks and various combinations of his assets, he has been able to capture much of the very discounts that he created. After over half a decade, it is still an event-driven opportunity. What are the opportunities to invest in parent companies for net negative costs today? Opportunities such as buying DirecTV at a discount via Liberty Media, known as "parent-subsidiary stubs," are among my favorite opportunities. Yahoo has been used by investors as the only convenient way to invest in Alibaba.

But that changed with Alibaba's recent IPO. Now, investors seeking exposure to Alibaba can do so directly. The subsequent abandonment of Yahoo's equity left it at a market capitalization less than its Asian assets. The domestic web portal is essentially free. To subtract the Asian stakes, one can buy ten shares of Yahoo and then short approximately twenty shares of Yahoo Japan and four shares of Alibaba.

For that, you get exposure to its domestic web portal. What then? The easiest way to monetize Yahoo Japan would be if it or all of Yahoo were taken private by its largest holder, SoftBank. As for the stake in Alibaba, the most tax-efficient solution would probably be for Alibaba to buy Yahoo.

Negative stub values such as these are real arbitrage opportunities worth exploring. In theory, one can deserve a big discount if the management is going to destroy value through malinvestment. The major caveat to this idea is that Yahoo CEO Marissa Mayer could go on an acquisition binge, in which she potentially squanders her company's cash on dubious, pricey tech targets.

In practice, that is unlikely in the case of Yahoo, where investors are actively encouraging a value-enhancing resolution of the curious puzzle of an equity stub that costs less than nothing. The partners at Rangeley Capital spent the final month of on an idea that I selected as my best investment prospect for The fourth quarter of was the worst quarter for almost every asset class, leaving many promising bargains in its wake.

Among the most deeply discounted was the senior secured loan market. Lehman Brothers had filed for bankruptcy late in the third quarter, and had flooded the market with its senior secured loan portfolio. Other leveraged holders with overlapping portfolios or direct exposure to Lehman became forced sellers too, as their prices were driven down. Highly leveraged, forced sellers usually liquidated their assets in a Bid Wanted In Competition BWIC process that immediately sold assets to whatever bidder could be found.

Sometimes, billions of dollars of loans traded hands within the course of a week as leveraged structures liquidated. This resulted in prices that would normally be associated with defaulted securities, even though few were in default.

The BWIC sales process is an extreme of price-insensitivity and time-sensitivity, which makes it ideal for buyers who are price-sensitive and time-insensitive. These loans are first to get paid in default, and have a lien on assets. The two key assumptions are the default rate and the recovery in default. Even with these draconian assumptions, the senior secured loan market was attractive at prices that had plunged to around sixty percent of par value after trading close to par for years. I wanted a Liberty Media-like double discount for our investment candidate, and found it when we reviewed the Investment Company Act of According to Section 18, closed-end investment companies had strict limits to their leverage.

The problem was that their debt was relatively stable, while their equity prices were plunging. This price move had the perverse consequence of increasing their leverage to the point that they were forbidden to make any distribution payments to the closed-end fund CEF shareholders. That is when the bottoms really fell out of their prices. I called many of the managers of these funds. They were highly diversified, and for the most part, all owned substantially similar portfolios.

I had one request and one question. My request was that they hold onto their securities if they default. My question was simply, "What are your shareholders asking? When the distributions stopped, they sold at any price they could get. By the beginning of , we had bought a substantial position in PFN, along with various other senior secured debt vehicles, such as Ares Capital Corp.

In hindsight, Ares worked out much better than PFN, but PFN was where we decided to put much of our capital, alongside one other Pimco fund and several similar funds managed by Eaton Vance. January was fine, but February and early March were awful. We held onto our investment, knowing that only a few months of retained interest payments on the performing loans would deleverage the CEFs enough to allow them to turn back on their distributions.

The distributions were turned back on, the prices stabilized, and the rest of the year was positive for this idea. Bill Gross, Pimco's founder, assumed direct responsibility for the fund's asset allocation.

None that I am aware of, but I would appreciate suggestions in the comment section below. Today, I see no such opportunities in either the senior secured debt market or in closed-end funds. Where started with liquidity constraints and forced selling, by today the market is awash with liquidity. The market is more like that which led to the credit collapse that I tried to exploit.

I have no remaining loan exposure, but were I forced to choose, I would rather short it than own it today. The market valued Loral at less than the value of its Telesat stake, perhaps because Telesat was not consolidated in Loral's financial reporting.

LORL's board and management were likely to take specific steps to maximize shareholder value. It was not as ugly as loans in , but it was a rough start to the year. After initial weakness, it recovered substantially over the rest of the year. Is there such an opportunity today? Yes, Loral has performed well since this idea was first initiated, but it is still attractive today.

I thought that Loral would have been wrapped up by now. In the first half of , the fundamental value of Loral's investment in Telesat has grown significantly. During the second quarter:. At today's price, Loral is for sale at a discount to its standalone value, and is likely to be sold within the next few years, when its Chairman decides to exit his investment. The company was the parent of LaBranche Financial Services, which offered securities execution and brokerage services to institutional investors and LaBranche Structured Holdings, a market-maker in options, futures, and ETFs on various exchanges.

A year earlier, LaBranche had sold its NYSE designated market maker, redeemed its debt, and authorized a share buyback. It was event-driven, since the company was buying back shares as quickly as it could and was selling operations. There was a benign explanation for the price in that no sell-side analysts covered it, and few people cared about it as an investment. The major caveat was that it was run by CEO Michael LaBranche, a cautionary tale of nepotism and generational mean reversion.

Where can I find such an opportunity to buy a pile of cash and NOLs at a discount today? One such opportunity is QLT Inc. QLTI , a small pharmaceutical company with a tumultuous past. In , QLT had three drugs on the market. The company's key drug, Visudyne, was losing market share to competitors. It sold the two other drugs, and focused on its pipeline and technology. The company was spending heavily on the development of a new technology to deliver medication to the eye through punctal plugs.

After a few years, activist shareholders were unhappy with the company's spending, and disagreed with the potential value of the company's pipeline. A group of activist shareholders replaced several board members, and the board has since restructured the company by:. The bank operates a stable regional banking model, with a high-quality loan portfolio and low fundamental risk.

We originally made a significant investment in OSHC by participating when the bank converted from mutual ownership to public stock ownership. This type of conversion requires three years from going public until Ocean Shore is allowed to be purchased. Our thesis was that the bank would grow its book value and reduce its discount to that value during this three-year waiting period.

The three-year regulatory window on Ocean Shore would end in December While the equity performed well in , management failed to sell to a strategic buyer. I am writing to urge the Board of Directors to undertake a strategic review. This would be a board-level decision. Our hope and expectation is that the board will make the right decision on behalf of Ocean Shore's owners.

We have been owners of Ocean Shore since the company fully converted from a mutual in I want to congratulate the Board on the successful completion of the conversion and the expiration of the three year moratorium on corporate actions. Over the past several years, this process has created significant value for all shareholders in the Company. The current Board of Directors also has important duties to Ocean Shore owners. Looking ahead, since the moratorium on corporate actions has expired and Ocean Shore is in a strong position regarding its loan portfolio and overcapitalization, we believe it is an ideal time to undertake a strategic review of potential avenues to maximize value for Ocean Shore's owners.

To maximize value, the Board of Directors should consider the possibility of a sale. Ocean Shore continues to trade close to tangible book value, a lower multiple than its peers. Even using conservative price estimates, a strategic buyer would likely pay a substantial premium to acquire the company today. It is in the interest of all shareholders for the Board of Directors to consider options that may be available to unlock substantial value for shareholders. As such, a strategic review would be in the best interests of the company and its stock holders and would likely receive a positive reaction from the capital markets.

Early in , Beneficial Mutual Bancorp BNCL will have completed its demutualization, and could be well positioned to buy Ocean Shore for a substantial premium to its current price. Where is there such an opportunity available to today's investor? We are still holding ours. One possibility is Putnam County Savings Bank.

This growing financial institution is likely to convert to a publicly traded bank within the next few years. You can visit any one of its branches and purchase a certificate of deposit CD. This CD will give you a right to participate in an equity offering, if one is launched as anticipated.

Typically, you would get to buy shares at a substantial discount to their market value. Gramercy now ticker GPT was my favorite long equity idea for The key to the investment is that the stock appeared to have a substantially negative book value, but that was misleading, because its substantial CDO liability was non-recourse to the parent company.

The true financial health of a healing, growing business was masked by this CDO exposure. The shares substantially closed the discount to their intrinsic value during the course of the year. Gramercy had been returned to financial health. Since our investment in Gramercy, we have been on the lookout for healthy companies that suspended their common and preferred dividends, and would be likely to turn them back on in the near future.

But as of today, we are still looking. A contingent value right CVR is a contract traded like a public equity. The company pays the owners when pre-specified milestones are achieved. These are often used in mergers when the buyer and seller cannot come to an agreement about the future value of a specific asset.

In this particular case, when Genzyme was purchased by Sanofi in , a CVR was used because the two sides could not agree on the future value of Lemtrada. The milestone for Lemtrada are as follows:. Based on our country by country analysis of the MS population in the five core European countries alone UK, France, Germany, Spain, and Italy , we believe the likelihood of reaching the first sales milestone is high. Since Lemtrada is administered in two treatments versus ongoing treatment for competitors, the sales of the drug are front-loaded and thus provide an advantage in achieving these sales milestones early.

Using data from the Multiple Sclerosis International Federation, the number of people diagnosed with MS in those five core European countries is as follows:. The total population of those diagnosed with MS in the five core European countries is about , Based on the increased efficacy of Lemtrada, the migration away from injectable treatment, the unique dosing regimen and comparable market share of other drugs, we believe this has a high probability of success.

Furthermore, we are not including sales in Canada approved December , Australia approved December , and all the other EU countries. If any of these countries add to the global sales, it makes the milestones even more achievable.

Genzyme resubmitted Lemtrada's application for FDA review, and that application was accepted for a six-month review in May. Genzyme presented data showing slowing brain atrophy was sustained after three years, and that treatment effect was maintained by over two-thirds of patients after four years. The early returns on the rights have been strong this year, especially after the FDA cleared it earlier this month.

One can still buy Sanofi value rights for a small fraction of the value of even their lowest milestone payment. But this year, there have been several other such opportunities. According to the tender offer for Durata:. Based on the safety and efficacy of the drug, it is reasonable to expect that both approval milestones are secured.

Additionally, it is possible to hit the revenue milestone. There are reasons to discount the potential of hitting the revenue milestone. Vancomycin is a well-entrenched incumbent. Clinical trials comparing the two drugs show them to produce similar results.

If it ramps up quickly enough, the revenue milestone could be in reach. Everything taught in the major cannon of value investing holds true for event-driven. Value investing involves focusing on capital preservation and demanding a margin of safety, so that one has selected securities at prices that can withstand inevitable future disappointments.

So does event-driven investing. Value investors think about securities as fractional ownership in businesses or loans to those businesses. They attempt to buy at prices that represent discounts to values measured based on one's analysis of the underlying businesses. So should event-driven investors. Additionally, they rely on prices making fundamental sense over the long term. With event-driven investing, instead of waiting for the long term, we wait only for the consummation of various corporate events for security prices to move towards fundamental value.

Neither value investors in general or event-driven investors specifically are engaged in predicting market directions, whether a specific stock will next move up or down, or what charts look like. We know that we don't know and suspect few of the people who think they know actually do. As with other types of value investing, there is no advantage to hyperactivity. There are tens of thousands of publicly traded securities and thousands of corporate events, but most can be ignored. Diversification is important, but one can take almost all of the advantage of diversification after the first dozen uncorrelated ideas.

So, event-driven investors can afford to be highly selective. Each core tenant of value investing is critical to even driven. Event investing is bottom-up - it is all based on facts specific to specific corporate events. Generalized ideas about markets are of little or no interest.

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Event Driven Investing

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Event driven managers seek to profit from security pricing inefficiencies that may occur when companies are involved in corporate events such as mergers, takeovers, restructures including share buy-backs, spin-offs and capital returns and capital raisings. The investment focus of such a manager is directed to analysing the likely effect on security prices due to a corporate event, rather than analysing and researching company earnings or dividend streams, which is the focus of traditional equity investment funds.

Due to the types of investments made by such managers and the general short to medium term holding period of each investment, the returns of event driven investments are likely to be less sensitive to movements in the general equity market than conventional equity investments. The aim is to produce consistent high risk-adjusted returns that are non-market correlated.

There are numerous investment strategies that may be used to profit from different corporate events. The timing and implementation of each strategy is a matter of manager judgement. Merger or risk arbitrage is the most well known event driven strategy and involves the acquisition of securities that are subject to a takeover or merger at a discount to the takeover or merger price, or where a higher price is expected.

If a takeover offer contains a security or non cash element, the event driven manager may short sell the securities offered as consideration or use derivatives to reduce the exposure to downward movements in the bidding company's security price. Some less well known arbitrage activities that an event driven manager may implement include dividend and rights trading arbitrage strategies. For example, a company may raise new equity capital that is not entitled to an upcoming dividend.

The event driven manager may be able to simultaneously buy the newly issued securities and short sell the existing securities at a price differential that exceeds the potential dividend and stock borrow costs. If the newly issued capital is raised by way of a renounceable rights issue, the event driven manager may be able to simultaneously buy the rights and short sell the existing securities at a price differential that exceeds the amount required to subscribe for the newly issued shares and stock borrow costs.

In both cases, low risk arbitrage profits may be generated that are independent of the direction of the security price and equity market. Changes to the composition of stock indices and location of a security's primary exchange listing may also enable an event driven manager to profit from price movements that result from changes in shareholder bases.

Although markets are generally efficient, certain securities at various times may be priced inefficiently from the perspective of an event driven manager. However, too many event driven managers operating in a small or illiquid market will tend to remove such inefficiencies fairly quickly and therefore reduce the risk-adjusted returns.

In such cases, running with the herd ie putting on the same trades as other event driven managers can be a recipe for mediocre risk-adjusted returns. Therefore, certain event driven managers may implement trades that are the opposite of the trades executed by the majority of event driven managers.

In summary, market efficiency may be welcomed by economists, but not by event driven managers - at least until the trade has been fully executed. A particular variant of the merger arbitrage strategy proposes investing in only the most certain and safest of deals. These deals have a slender profit margin with a tiny risk of losing a large part of the investment.

Merger Arbitrage Limited has many articles with examples relating to merger arbitrage on this website. Thus, the offer premium is This equates to a 2. The skill of the manager is not only in avoiding deals that might fail but also in finding deals that have disproportionately high spreads in relation to the potential loss in the case of deal failure. Through detailed analysis, the investment manager attempts to gauge the severity of the drop in the stock price following deal cancellation.

However, if a deal was to fail, this in itself creates a new event and opportunity for profit. Some arbitrageurs may short a stock on the way down following a deal break announcement. Subsequently, if this drop is in excess of what the manager considers a fair price, the manager may then go long to stock and wait for a bounce.

This strategy is considerably more risky than standard merger arbitrage. For more risks and deals complexities, we advise the reader to peruse previous Merger Arbitrage Limited articles such as deal extension risk. In the example above, maybe because of regulatory issues deal closure takes 12 months instead of 6 months. This halves the return and makes the investment pay the same as holding cash.

Deals such as those in protected industries energy or telecommunications for example , tend to take longer to complete, as do deals involving multiple regulatory agencies from different countries. However, these factors are often known at the beginning so it is the unexpected delays such as the FTC asking for more information via a 2 nd request which can destroy the profitability of a trade.

On top of this, the event driven investment manager must consider dividend payments. In the case of a stock offer, the portfolio manager must also consider the costs of borrowing the acquirer stock. This may sound complex, but we have constructed a merger arbitrage spread calculator to do this for you.

For added complexity, professional arbitrageurs can use bonds to take advantage of the yield discrepancy between the two companies. Dividend arbitrage is a less common activity that an event driven manager may implement. For example, a company may raise new equity capital and use a different class of stock. This new stock class may not be eligible to receive dividends. The trader attempts a simultaneous purchase of the newly issued securities and shorts the existing securities at a price differential that exceeds the potential dividend and stock borrowing costs.

If a company decides upon a change in its corporate strategy, it may decide to spin off a subsidiary to shareholders. Spinoffs tend to prosper following the separation, as previously the business unit did not fit well with the parent company. A dedicated management team usually has the latitude to operate more freely as a separate company. Investors analyze the spinoff company and the post-spin parent to see if the combined value is greater than before.

This provides the rationale for making an investment or not. Investors also look for spinoffs after the event that trade at a discount. There are times when a parent company may choose to list the spinoff on a different national exchange. This may happen because of geographic proximity. Ownership of a foreign security by an investment fund may be restricted as per its own investment guidelines or domestic regulations.

If this causes the spinoff to trade at a discount, local investors will be able to profit from the pricing inefficiency. However, spinoffs are less well known. When a company raises capital by way of a renounceable rights issue, the event driven manager makes a simultaneous purchase of the rights and shorts the existing stock. The price differential must exceed the amount required to subscribe for the newly issued shares and stock borrowing costs. Sometimes a firm needs cash, and as a last resort, they decide to issue equity at a large discount to the current market price and dilute existing shareholders.

Buyers in this situation are generally qualified institutional investors who can buy a private placement. These new shares are subject to a lock-up arrangement. This restricts sale of the stock for a fixed period. However, immediately following the announcement, buyers of this new stock start shorting the original stock to lock in the price difference, or spread. The manager can employ additional financial products such as derivatives to accomplish the hedge.

The key here is speed, as following the deal announcement it completes rather quickly. Capital Structure Arbitrage takes advantage of mispricing within various securities of the same company, typically in a period of financial stress. The distressed investors assess what each class of securities should be worth, and buy the securities that seem the most undervalued. Distressed securities are often corporate bonds, bank debt and trade claims of companies that are in some sort of distress, such as bankruptcy.

However, rather than go through bankruptcy, a company can go to its banks, stock and bondholders and propose a plan to recapitalize the company. Usually, this dilutes the equity and forces the bondholders to take a small loss. Since it is voluntary, creditor committees negotiate the result with the company, and investors try to buy the securities that are the most undervalued.

After a default, distressed investors analyze the value of the company and its liabilities. They look for the class of securities in the bankruptcy pecking order that the company is unlikely to repay in full. The owners of that class of securities will likely control the company post-bankruptcy, and will be able to propose a plan to recapitalize the company, replacing the old securities with a new security class. Senior securities will receive payment close to a full amount, whereas junior securities may get little if anything.

Investors seek to capitalize on the subsequent momentum caused by an unexpected revelation made during the earnings announcement. A decline in earnings may lead to a downgrade in either stock or credit an encourage traders to short the stock. The event driven manager attempts to profit from price movements resulting from changes in shareholder bases.

In order to maintain the correct weighting for an index-tracking product, the portfolio must include new index entrants. Following a merger or bankruptcy, or some other unknown reason a given stock may leave a given index. The replacement stock will often see its price rise as passive investment managers scramble to maintain the correct index weighting and minimize tracking error. Most indexes have clearly defined rules, which enable the manager to know in advance what stock are likely to be the next replacements.

However, the timing of when that stock moves into the index is unknown. When hurricanes threaten to damage, investors estimate the likely losses. During this period, the volatility of insurers and reinsurers stocks increases dramatically as investors take positions.

Event driven managers can also trade catastrophe bonds. Some specialized hedge funds offer industrial loss warranties to hedge the risks of insurance companies, with prices changing in real time depending on liquidity. For the most part markets are generally efficient. However, occasionally the market prices of certain securities trade inefficiently and the event driven manager seeks to exploit this.

Although too many event driven managers operating in a small or illiquid market will tend to quickly remove such inefficiencies thus reducing the risk-adjusted returns. In extreme cases, this overcrowding may push prices too far in one direction and again create a state of market inefficiency but in reverse.

Astute managers are keenly aware of this. Certain event driven managers specialize in these situations and may implement trades that are the opposite of what was initially expected and take a position against the majority. Economists may welcome market efficiency but event driven investment managers take the opposite view.

That is, until they fully execute their initial trade. The investment focus of the manager is to analyse the effect on security prices due to the event in question. This is in contrast to traditional equity investment funds who focus on analysing and researching company earnings or dividend streams. Investment firms using event driven investment strategies employ teams of specialists who are experts in analysing corporate actions. The manager then makes a decision on how to invest in the situation.

This decision makes use of the available financial instruments such as stock or bonds. To illustrate, we again use a merger arbitrage example. Once an acquiring company announces its intent to buy another company, the stock price of the target company typically rises. However, it usually remains below the acquisition price.

This discount, known as the spread , reflects the uncertainty about whether the acquisition will complete or not. Event-driven managers analyze the deal particulars, which may include but are not limited to the reasons for the acquisition , the terms of the acquisition and any regulatory issues. With this information, manager determine the likelihood of the acquisition successfully completing. If the target stock price suggests a lower likelihood of deal completion, the manager will buy the stock.

The manager is comfortable buying the stock, as opposed to the traditional manager who does not have the expertise to determine if the deal will go through. The traditional manager often sells the stock before the acquisition completes and realizes a profit but sacrifices the remaining upside. This remaining upside, or spread , is where the merger arbitrageur can profit.

One can differentiate event driven investment strategies by their investment horizon. The different types of strategies and investments made by event driven managers lead to a spectrum of investment horizons. High-Frequency investors typically have an investment horizon of less than five minutes. The aim of these strategies is to profit from high volume, low margin trading. Tender offers in merger arbitrage can complete in a number of weeks. Although the overall average completion time for a cash deal is usually months.

Whereas investment in debt securities during a bankruptcy process may require a number of years if the stakeholders do not reach a consensus on how to compensate the lenders. Perhaps the biggest know occurrence of implementing event driven investment strategies is the subprime crisis. Some traders foresaw the dangers of the overly generous lending practices within the mortgage industry.

Subsequently, they accordingly took positions in an array of financial instruments. Following the initial reports and effects on the wider financial system, many traders took advantage by taking large short positions primarily in finance related stocks. Reverse merger arbitrage also became commonplace. This is where traders speculated on the break-up of specific deals primarily due to the lack of available financing. Event-driven investors must be willing to accept some risk.

Corporate events do not occur as planned and this requires the flexibility to re-evaluate constantly. Event driven investors must have the necessary skill set to assess accurately the likelihood of this occurrence. A significant risk in this arena is liquidity risk. This is especially true for high yield bonds and illiquid investments such as small cap stocks or certain derivatives. During a market panic, exiting these products can be difficult. The manager must be aware of over exposure in these investment classes.

As previously mentioned, merger arbitrage accounts for a large portion of event driven trading. Whether or not a deal completes successfully, the path taken to completion is rarely a smooth one. Deal delays, or deal extension risk can destroy the profitability of the trade. In times of economic downturn, it becomes more difficult to obtain financing. The subprime crisis provides numerous examples of this.

A deal failure is the worst scenario for a merger arbitrager.

Event driven investing ad forex spread betting strategies

How to make money using this Event Driven Trading Strategy

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