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.

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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


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