Event-driven at pods
Anyone working at a pod know what the large platforms do in event-driven? Is it merger arb only? If not, how do they hedge those sits?
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interested as well.
Not merger arb only but predominantly is. Depends on PM. Hedge it like how you hedge anything.
How on earth do merger arb PMs survive at platforms? Heavily concentrated books with massive downsides that can’t be hedged if deals were to fall apart. Given tight drawdown limits, what am I missing here?
That’s correct. You inherently cannot hedge the large downside risk because that’s the idiosyncratic/deal risk you are taking. Some MMs are less stringent on temporary drawdown limits but the reality is if you get caught in one deal fully breaking, you’re game over. That said, I’ve seen the churn rate of merger arb PMs to actually be lower than l/s. Remember that there’s effectively no daily vol for a lot of these positions and most deals do complete..
Based on the most helpful WSO content, large platforms at pods don't just do merger arbitrage. They also engage in other event-driven strategies such as special situations and distressed investing.
As for hedging these situations, it can be quite complex and varies from fund to fund. Some may use options, futures, or other derivatives to hedge against potential losses. Others might use a more qualitative approach, analyzing the specific circumstances of each situation to determine the best course of action.
Remember, the key to success in these types of strategies is not just about picking the right investments, but also managing risk effectively. So, while I can't give you a specific answer on how they hedge, I can tell you that it's a critical part of the process.
Hope this helps, and remember, don't let the bananas get the best of you!
Sources: Merger Arb/Risk Arb?, Anyone happy at a multi-manager?, Event-driven / special sits interviewing, https://www.wallstreetoasis.com/forum/hedge-fund/the-future-of-special-situations-distressed?customgpt=1
You can hedge through a put (spread) if you're long the stock to provide some form of protection. Generally at the pods PMs will size their positions such that in case of a deal break risk limits are not breached. This is why you're still seeing (small) spreads in populara event stocks like Activision or Horizon - these deals are almost certainly going to close but the spreads are still there, which is a function of arbs unable to add more to their books in without breaking risk limits on position sizes
I have seen teams at pods who do various forms of event driven (to varying degrees of success)- there are the "traditional" merger arb guys who play deal spreads and then more blanket event driven guys who can try to do a little bit of everything / can invest across the cap stack
Any sense which approach has been more successful amongst PMs?
i have seen more merger arb guys blow up vs the catch all special sits. But that could just be the sample size. Merger arb seams to have been tougher the past 2 years given aggressive anti-trust/ lower &A volume / higher interest rates.
Lots of failures of event driven pods in Asia, open ended question whether this strategy is consistent with a pod model.
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