Event-Driven Investing is a strategy in which managers buy and sell securities in anticipation of certain catalysts- specific events during which the price of the securities will change dramatically. Such events may be merger announcements, bankruptcies or regulatory approvals. Two major types of event-driven investing are activist and distressed investing.
Q. So, there are lots of different ways to categorize and define different investing styles… what counts as “event driven”?
A. Well, as it sounds, these are investments in which the investment manager expects some particular event to act as a catalyst to increase the value of a security.
That could be anything from a takeover offer to a bankruptcy; it might even be the announcement of FDA approval for a new drug, or some big strategic partnership.
But probably the biggest two categories of “event driven” are activist and distressed investing.
Q. Right, so “event driven” investors could be looking at either stocks or bonds?
A. Yes, depends on the style. Activist investors, of course, will usually buy a stock, and then work to increase the value either collaboratively, working quietly with management behind the scenes, or aggressively, by launching a proxy fight and a PR war. There are activist funds that specialize in each style.
Q. And what about bonds and credit instruments?
A. There, the buyers are more often distressed investors, who try to buy up bonds at a huge discount and then, of course, collect more than they paid. Very often, these sorts of investors are real bankruptcy mavens, and a lot of the magic happens during the workout process after the bankruptcy filing. Other holders don’t have the expertise or patience to play that game, so they sell for cheap.
Q. And how do these kinds of strategies stack up performance wise?
A. Historically, quite well. Some of the most famous names out there, like David Tepper, Bill Ackman, and Dan Loeb, fit into the “event driven” category, and its one of the areas where there really can be a lot of upside.
Q How do investors get in on this sort of action?
A. Very generally, these opportunities don’t fit super well into liquid alternatives because they take time to work… and they take a lot of work. So most investors will look at private placements. That said, there are a few event driven mutual funds out there with pretty good track records.