Event driven investment (EDI) strategies attempt to profit from the occurrence of pricing inefficiencies caused by a corporate event or other outside external factor affecting company operations. However, more recently, this definition has expanded to include additional events that can significantly affect the company’s operations. Event driven trading itself falls under the category of Alternative Investments. This type of trading is a common mainstay amongst hedge funds. The term is closely associated with Special Situations investing and the terms are often used interchangedly.
When planning or initiating a trade, the event may have already happened or may happen in the future. It may still be in the planning stage or is currently happening. The event itself maybe be successful or not as determined by subsequent stakeholder actions. However, an investment or trade based upon this corporate action renders it an event driven investment strategy.
Event Driven Investment Examples
One can execute an event driven investment strategy to profit from various scenarios in multiple ways. However, the accessibility to individual traders and investors is often limited due to capital and research requirements. Examples of the more common and well known strategies are given below
- Merger arbitrage
- Restructuring, Dividends, Share buy-backs, Capital Returns
- Spinoffs
- Capital Raisings, Rights Issues, Private Investment in Public Equity (PIPE)
- Capital Structure Arbitrage – Default, Reorganization, Bankruptcy
- Activist Investors
- Index Arbitrage
- Hurricanes, Earthquakes, Volcanic Activity
Perhaps the biggest know occurrence of implementing this type of strategy is the subprime crisis. Some traders foresaw the dangers of the overly generous lending practices within the mortgage industry. Subsequently, they accordingly took positions in an array of financial instruments. This strategy was successfully utilized by Cornwall Capital and profiled in the book “The Big Short” by Michael Lewis which was also made into a successful movie. For more information see our article Event Driven Investment Strategies.
