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Event Driven - Hedge Fund Strategies

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A brief overview of a hedge fund strategy used in alternative investment markets. …

A brief overview of a hedge fund strategy used in alternative investment markets.

Published in Economy & Finance , Business
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  • 1. Hedge Fund Strategies Event driven
  • 2. Event driven Index: 1. Definition 2. Types of events 2.1. Distressed securities - Risks 2.2. Merger/risk arbitrage - Risks 2.3. Refinancing 2.4. Restructuring 2.5. Recapitalization
  • 3. 1. Definition Event driven: Evolves to profit from significant corporate events as bankruptcies, recapitalizations, mergers and acquisitions; The performance is similar that of distressed strategies or merger arbitrage, depending on the business cycle: “Corporate Life Cycle Investing” (Donald & Lacey, 2003)
  • 4. 1. Definition According Connor & Lasarte (n.d.) The distressed securities investing and risk or merger arbitrage are the two main divisions within this category.
  • 5. 2.1. Distressed securities Distressed securities strategy focuses on the securities of companies experiencing financial difficulties, where it is used, sometimes, to refer to the securities issued by companies which filed for credit protection and have defaulted. Some hedge funds focusing on this strategy are active in the entire market. (Connor & Lasarte, n.d.)
  • 6. 2.1. Distressed securities Risks: - Buying distressed securities is identical to placing a bet on the comeback of troubled companies; - The measurement of restructuring is hard to forecast; - Typically Volatility and illiquidity on prices for distressed securities (for example, during the restructuring, regulators may prohibit the selling of a company’s stock) (Connor & Lasarte, n.d.)
  • 7. 2.2. Merger/risk arbitrage Merger/risk arbitrage: is on the securities of mergers and takeovers. The target company’s share price usually carries a ‘bid premium’, a discount to the proposed takeover price, until the merger or takeover is finally completed, because of the possibility the merger may not go through. (Connor & Lasarte, n.d.)
  • 8. 2.2. Merger/risk arbitrage Risks: - possibility that regulators will block the transaction; - to carry out the purchase, the acquirer could lose the financial backing. (Connor & Lasarte, n.d.)
  • 9. 2.3. Refinancing Refinancing: Refinancing may also be part of a recapitalization or strategic activity and is an event typically created by upcoming debt maturities. Where Corporations may issue lower interest rate securities or issue new debt or equity in order to extend maturities. (Arbitrage Funds, n.d.)
  • 10. 2.4. Restructuring Restructuring: Events where a company may alter its balance sheet, purchase, sell, or spin-off assets to address competitive issues, creditors, business cycles, or shareholders. (Arbitrage Funds, n.d.)
  • 11. 2.5. Recapitalization Recapitalization: by changing the proportions of debt to equity, the corporation can change its capital structure. Companies may choose to purchase common stock by issuing debt, in calmer markets. Companies may seek to exchange debt for equity in order to reduce leverage, in distressed markets. (Arbitrage Funds, n.d.)
  • 12. References Connor, G. and Lasarte, T., n.d., ‘An Overview of Hedge Fund Strategies’, International Asset Management; Donald,E. and Lacey, Jr., 2003, ‘Democratizing the hedge fund: Considering the Advent of Retail Hedge Funds’, Third Year Paper, Harvard Law School; Slides ‘The Arbitrage Event-Driven Fund’, n.d., Water Island Capital, https://www.arbitragefunds.com