Event driven investing is an investment strategy that aims to capitalize on price movements driven by anticipated corporate events. Some key concepts and strategies around event driven investing include:
Event driven investing seeks to profit from major corporate events like mergers, acquisitions, restructurings, spinoffs, earnings announcements, clinical trials results, FDA approvals etc. The goal is to identify mispriced securities based on the expected outcome of these events.
Investors need to analyze factors like potential deal synergies, regulatory hurdles, financing terms to estimate the likelihood of the event happening and the impact on stock prices. Extensive research into companies and industries is crucial.
Common event driven strategies are merger arbitrage, distressed securities investing, special situations and catalyst driven strategies. Each strategy involves buying and shorting stocks in combinations to hedge out market risk.
Traders need to be nimble to enter and exit positions quickly as new information becomes available. Risk management is vital to limit losses on unconsummated deals. Programming skills to screen for events and automate trade orders are beneficial.
Key resources for sourcing event driven opportunities include SEC filings, news flows, analyst reports and industry conferences. Subscription to services providing real-time alerts on events is often necessary to keep up with the speed of information.
Event driven investing requires specialized skills and constant monitoring. But the returns can be rewarding for investors able to accurately analyze outcomes of major corporate events.
Merger arbitrage – profiting from price differentials in acquisition deals
Merger arbitrage involves simultaneously buying the stock of an acquisition target while shorting the stock of the acquirer. The goal is to profit from the price differential when the deal closes. Extensive financial modeling and analysis is done to determine the fair value spread between the purchase price and market price. Positions need to be constantly monitored and adjusted as new deal terms get announced. Risk management is key to avoid large losses if deals break.
Distressed securities – investing in companies in bankruptcy
Distressed securities investing focuses on stocks and bonds of companies in financial distress, with high default risk. The thesis is that these securities get excessively punished and are mispriced relative to recovery value after restructuring. Detailed valuation work and bankruptcy proceedings analysis can lead to attractive opportunities. Risks include companies liquidating with zero recovery, making position sizing and diversification important.
Special situations – mispricings due to spinoffs, buybacks, earnings etc.
Special situation investing looks to capitalize on specific one-off corporate actions and events. For example, value creation from a spinoff transaction or added cash flows from an asset buyback. The mispricing opportunity comes from the market underappreciating the financial impact of these events. Investors can buy ahead of the catalyst and profit from the re-rating.
Event driven investing requires continuous monitoring of corporate developments and meticulous analysis of likely outcomes. When done well, it can generate uncorrelated returns attractive on a risk-adjusted basis.