What does "event driven" mean?
As dumb as the question may look, that's it. The reason I'm asking is I feel it's becoming a place holder for something either too complicated to explain or too vanilla to use as an investment strategy, similar to special situations.
I've seen event driven meaning merger arbitrage, distressed debt investing via the restructuring/ bankruptcy process, activist investing, etc. Essentially anything that implies underwriting a thesis with a concrete catalyst. How am I wrong there? Can somebody provide a quick rundown of what it means when they hear a hedge fund say "we're pursuing an event-driven strategy"?
Thanks!
It means we use insider info but we can't say it so we pretend that we can consistently predict future events with enough accuracy to be extremely profitable on a risk-adjusted basis
The not-so-subtle sarcasm in your comment notwithstanding, would you mind elaborating? Thanks
It means we ellicit insiders to drop illicit info on potential events or post up outside the revolving door of employment at places like the SEC/IRS/Congress in order to get unofficial official information all in the search of quid pro quo. Until we move up to the next level and get one of our own into to a national government position in order to keep our pipeline filled and have de facto legal shielding. /jaded rambling I've personally lived through
I think that’s more or less in-line with my understanding. I think event driven is generally investing based on sometimes non-economic / business reasons. Like fundamental investing is doing all the business analysis and figuring out which companies will be bigger and grow and which may not. Event driven more so may focus on the non-economic/business stuff like chances a merger closes, doing some technical debt/bankruptcy process stuff, maybe some political overhang on a stock or a situation where there is a major lawsuit, a proxy contest, a sale process, a spin-off, a board fight, major management change, a scandal, etc. Sometimes some companies go through crises or other kinda things that may overshadow the economics of the business and drive its stock price in the short/medium term. I think event driven investors focus on being good at trying to understand those kinds of risks and investing based on that kind of expertise as opposed to maybe just pure business fundamentals. I hope this helps. Best wishes and good luck! :)
Hey,
Ben covered it well but adding some thoughts as I worked several years for a event-driven HF on equity.
Indeed event-driven is a very wide term and a lot of strategies go there. Let's say that event driven HFs will be active only when there is a specific event going on at the company level.
In general the event-drivent HFs are active after the annoucement of the event, they sometimes try to anticipate it but it is a smaller part of the book. Main equity strategy is merger arbitrage, but other corporate actions are also part of the universe : for example capital increase, partial tender, spin-offs, dividends. Index rebalancing is sometimes also consider as an event-driven strategy.
The expertise of those HFs is on the specifities and technicality of the events: understanding the process, the risks, the different stackholders' interests, the flows, etc... more than on the fundamental part, even if processes differ across funds.
I can go into more details on a specific point if needed
I know you said you worked on the equity side but would you happen to have any idea on the credit side of event driven investing?
Event-driven credit can include asset sales, reorganizations, restructurings, and similar events as above including mergers, capital raises, dividends, etc. There are also more nuanced, legal event driven situations such as covenant breaches, collateral stripping, springing covenants, etc. In general, anything that is a leveraging or deleveraging event for a company will move a credit in some direction
Sorry I can't really help you on the credit side.
I would say on average it is more long term and maybe more fundamental than equity.
In terms of example you can look at SMCP / Bloomberg ticker SMCP FP, a french retail clothes company, where there was a default from the major holder that had its shares as collateral for its debt. It is both equity and credit situation. I did not follow the situation closely so can't say much more.
Thanks both for colour around the general concept as well as on credit. I'm particularly interested on the credit side and I guess the best way to actually grasp it would be via analysing real plays - would you be able to point me towards some research material/ fintwit/ blogs/ articles/ anything that walks through a more complex event driven trade? I understand merger arb at a high level but there's so much more depth I feel. Thanks!
Maybe have a look here you may find some info :
https://www.linkedin.com/company/financial-networking-group
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