Event Driven Hedge Fund
What is an Event Driven Hedge Fund? | DefinitionAfter running this blog for several years, I come across many familiar questions so I am putting together a frequently asked questions page to help answer some of these basic hedge fund questions as well as posting the answers here. To start, here is a quick question and answer on what is an event driven hedge fund? For more hedge fund questions and answers please see our FAQ page here.
Question: I often hear about event-driven hedge funds in the news but I'm not sure what that means? Is that a fund structure or a strategy?
Answer: An event-driven hedge fund is a fund that follows a popular hedge fund strategy that focuses on transactions affecting a corporate structure. One general event-driven hedge fund strategy is known as the multi-strategy hedge fund wherein a hedge fund invests in various opportunities created by events or market conditions and does not limit the fund to a specific strategy like commodities or long/short small cap equity.
For fund managers with such a narrow focus, the manager may need to launch a new fund to take advantage of a special situation rather than simply executing the strategy on behalf of current investors. John Paulson and Paulson & Co. for example, ran into this situation when he sought to execute a massive bet against the mortgage industry; many of his investors initially balked at the idea of a merger arbitrage trader "drifting" from his niche expertise to trade on the housing bubble. If Paulson had initially launched a multi-strategy fund then perhaps his investors would be more comfortable with his perceived straying from his expertise.
One of the most popular event-driven strategies focuses on mergers and acquisition activity and seeks to trade on opportunities related to this M&A activity. This strategy is known as merger arbitrage (risk arbitrage or deal arbitrage are other names for the strategy) and it can be highly lucrative for skilled traders who can judge how deal activity will affect various firms.
Another type of event-driven hedge fund strategy is distressed debt investing where the hedge fund invests in various opportunities created by distressed companies, often by buying the company's debt in a restructuring with the hope that it will increase in value.
For more frequently asked questions like this, please see our FAQ page.