Event-Driven Strategy

Event-driven investors analyse how particular events are likely to affect the prices of a company’s shares or bonds, and take positions to profit from those changes.

Common event-driven strategies include merger arbitrage, which involves buying shares of a company being acquired and sometimes shorting the acquirer’s shares, aiming to profit from the gap between the current price and the offer price; distressed investing, buying the debt or shares of companies in financial difficulty or bankruptcy, betting on a recovery; special situations, such as spin-offs, share buybacks and restructurings; and activist investing, buying stakes to push for changes.

For example, if a company agrees to be acquired for 50 per share and its shares trade at 48, a merger arbitrage investor might buy them, expecting to earn 2 per share when the deal closes.

Event-driven returns depend more on whether specific events happen as expected than on the overall direction of markets. The main risk is that deals fail or events turn out differently, which can cause large losses. Event-driven strategies are often affected by economic conditions, regulation and deal activity.