Special Situations

The term special situations has become open to broad interpretation. As more investment funds have picked up on the terminology, the term has become more varied as each fund adds its unique approach to executing its investment strategy. In his book Security Analysis, Benjamin Graham offers this definition of special situations:

In the broader sense, a special situation is one in which a particular development is counted upon to yield a satisfactory profit in the security even though the general market does not advance. In the narrow sense, you do not have a real “special situation” unless the particular development is already under way

In this sense, the term evokes similarities to “event driven investment” in the hierarchy of financial terminology. This in itself covers the strategy of merger arbitrage which is perhaps the best investment strategy in this category. In addition to merger arbitrage, there are a number of additional corporate actions, considered to be internally generated, or external events that could qualify under the heading of special situations.

Typically, direct investment in these types of strategies is difficult for the indiviual trader or investor. Large capital requirements and the breadth and scope of research required to locate trading opportunities are generally sufficient to prohibit accurate and profitable trading. Therefore, there are a number of hedge funds specializing in these types of strategies. As the focus of these strategies at any one time is at the discretion of the

hedge fund manager, making comparisons between these funds can be difficult. Merger Arbitrage Limited maintains a list of these event driven hedge funds for easy reference for our readers.