Hedge Fund Strategies Event driven

Index:1. Definition2. Types of events 2.1. Distressed securities

- Risks 2.2. Merger/risk arbitrage

- Risks2.3. Refinancing2.4. Restructuring2.5. Recapitalization

Event driven

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)

1. Definition

According Connor & Lasarte (n.d.)

The distressed securities investing and risk or merger arbitrage are the two main divisions within this category.

1. Definition

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.)

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.)

2.1. Distressed securities

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.)

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.)

2.2. Merger/risk arbitrage

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.)

2.3. Refinancing

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.)

2.4. Restructuring

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.)

2.5. Recapitalization

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

References