Institutional Investors

The Balance: Considering Event-Driven Investing

I published another article at The Balance: Considering Event-Driven Investing.  This is one place where writing in the third person leaves a lot out.  I’ve done a lot with some types of event-driven investing.

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

We respect your email privacy

Q2 hedge fund letters, conference, scoops etc

Event-Driven Investing

mohamed_hassan / Pixabay

  • Speculating on hurricanes — I did that successfully at the hedge fund 2004, 2005 and 2006.  2006 because I thought the risk of another strong hurricane year was overplayed.  2004 and 2005 because I had a good idea of who was underreporting claims after disasters.  That was the only time in my life that I went from long a company to short without stopping, and I covered on the day the CEO resigned, and caught the bottom tick.
  • Bond deal arbitrage — well, sort of.  I would buy target company bonds and sell the bonds of the parent.  I had to be certain that the deal would go through, but it was a tremendous yield enhancement is the right situations.
  • From the prior article, speculating on Lula’s non-impact on Brazil qualifies as event-driven.
  • Stock arbitrage — did a lot with it when I was younger.  Didn’t do so well.
  • Index arbitrage — did a neutral trade where we shorted one company out of the Russell 2000, and bought another one in.  Made no money on the trade.  We had a good fundamental justification for the trade, but it just goes to show you that this isn’t as easy as it looks.
  • I buy a decent number of spinoffs.  Most succeeded as investments for me.

Now, all that said, most areas where there are simple arbitrages typically boil down to a simple credit risk: will the deal get completed? Will the company not take an action that changes its capital structure in a way that hurts me?

Since these are relatively simple trades, the returns are relatively low like that on a short-term junk bond — at present, like the yield on T-bills plus 2-3%.  It’s not very compelling given the risks involved.  Most of the mutual funds that do that type of arbitrage have not done so well.

Thus, aside from spinoffs, at present, I don’t do that much with event-driven investing.  Many of the forms of it are too crowded, and I prefer simplicity in investing.

Article by David J. Merkel, CFA, FSA - The Aleph Blog

LEAVE A COMMENT


Saved Articles
X
TextTExtLInkTextTExtLInk

Are you a smart investor? Join tens of thousands of sophisticated investor reading our authoritative free newsletter

* indicates required


Congrats! Are you a smart person?

We have an exclusive targeted for being a sophisticated and loyal reader.

Sign up today and get three months free

Use coupon code vip19 or click on the button below

Limited time offer only ENDS 10/31/2019 or after next 25 20 subscribers take advantage whichever comes first – please do not share this discount with others

 

WhatsApp chat
0