What are Event Driven Strategies?
A investing and trading strategy that seeks to take advantage short-term mispricing of a company's stock that may occur before or after a corporate event, such as an earnings call, bankruptcy, merger, acquisition, or spinoff.
Event-driven investing strategies are typically used only by large institutional investors, such as hedge funds and private equity firms. That’s because traditional stock investors, including managers of mutual funds, do not have the expertise or access to information necessary to properly analyze the risks associated with many of these corporate events.
Why You Care
Small individual investors has the same advantage as hedge funds over mutual funds. Both small investors and hedge funds can buy and sell much faster than mutual funds, thereby having a better chance of taking advantage of events that temporarily misprice stocks.
Stocks can become temporarily mispriced because investors as a whole often become concerned when a company is going through a corporate reorganization, restructuring, merger, acquisition or other major event. This can lead the stock price to stagnate until investors feel comfortable with its stability again. When a hedge fund manager or other event-driven strategist finds a potential investment, he or she will examine the underlying value of the company and the situation surrounding the event, including potential regulatory pitfalls. If he or she feels positive about the event and the strength of the company, he or she may buy shares to sell later when the price adjusts.
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