CFA Institute, Graham and Dodd Award of Excellence for 'Hedge Fund. PDF file (last version before publication) Third most highly cited paper in the. [28] 'Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds,' with William Fung. Sep 25: NYC Retirement Systems, Hedge Fund Seminar. Equity-oriented hedge fund strategies exhibit payoffs resembling a short position in a. Paris, Workshop on Empirical Methods in Finance at the London School of. Mutual funds predominantly employ relatively static trading strategies while.
Last Update: January, 2016.Education:· Massachusetts Institute of Technology, Ph.D. in Economics, 1981.
· Yale University, B.S. in Economics and Mathematics, 1976. Summa Cum Laude, Phi Beta Kappa.
· Phillips Academy, Andover, 1972. Cum Laude.
Academic Appointments:
· Professor, Fuqua School of Business, Duke University, 1993-present.
· Associate Professor, Fuqua School of Business, Duke University, 1989-1993.
· Associate Professor, Graduate School of Business, University of Chicago, 1985-1989.
· Assistant Professor, Graduate School of Business, University of Chicago, 1981-1985.
· Professor, Fuqua School of Business, Duke University, 1993-present.
· Associate Professor, Fuqua School of Business, Duke University, 1989-1993.
· Associate Professor, Graduate School of Business, University of Chicago, 1985-1989.
· Assistant Professor, Graduate School of Business, University of Chicago, 1981-1985.
Other Appointments:
· Consultant, International Monetary Fund, 2007-2016.
· Consultant, Bank for International Settlement, 1998.
· Visiting Scholar, International Monetary Fund, July 1998.
· Visiting Scholar, Board of Governors of the Federal Reserve System, 1990.
Honors and Awards:· Consultant, International Monetary Fund, 2007-2016.
· Consultant, Bank for International Settlement, 1998.
· Visiting Scholar, International Monetary Fund, July 1998.
· Visiting Scholar, Board of Governors of the Federal Reserve System, 1990.
· CAIA (Certified Alternative Investment Analyst Association), 2015 Award for Excellence in Alternative Investment Research.
· CFA Institute, Graham and Dodd Award of Excellence for 'Hedge Fund Benchmarks: A Risk-Based Approach,' co-authored with William Fung and published in the Financial Analysts Journal in 2004.
· Bank of America Faculty Award in 2002.
· Teaching in Excellence Award, Duke Cross-Continent Executive MBA Class of 2002.
· Fischer Black Memorial Foundation, 1999 Robert J. Schwartz Memorial Prize, for the best paper on hedge funds.
· 1990 Smith Breeden First Prize for the best paper in the Journal of Finance for the article 'Margin Regulation and Stock Market Volatility' (joint with Merton H. Miller).
· 1976 Yale Science and Engineering Association High Scholarship Award (for the highest class standing after seven semesters).
· 1976 Russell Henry Chittenden Prize (for the Yale senior with the highest scholarship in the natural sciences, including mathematics).
Research Interests:
· Dynamics of asset prices and their implications for financial risk management.
· Risk and return in hedge funds and commodity funds.
· Dynamics of asset prices and their implications for financial risk management.
· Risk and return in hedge funds and commodity funds.
Professional Affiliations:
· American Finance Association
· Society of Financial Studies
· Finance Editor, Management Science, 2003-2009. [Rejection rate: 83% (2003).]
· Associate Editor, Economic Letters, 1998-present.
· Associate Editor, Journal of Empirical Finance, 1992-2013.
· Associate Editor, Journal of Business and Economic Statistics, 1992-2000.
· American Finance Association
· Society of Financial Studies
· Finance Editor, Management Science, 2003-2009. [Rejection rate: 83% (2003).]
· Associate Editor, Economic Letters, 1998-present.
· Associate Editor, Journal of Empirical Finance, 1992-2013.
· Associate Editor, Journal of Business and Economic Statistics, 1992-2000.
Teaching Interests:
· Finance core course, investments & portfolio management, fixed income securities, financial risk management, international finance.
· Finance core course, investments & portfolio management, fixed income securities, financial risk management, international finance.
Publications
Book:
Nonlinear Dynamics, Chaos and Instability: Statistical Theory and Economic Evidence, with William Brock and Blake LeBaron, Cambridge: MIT Press, 1991 (328 pages).
Refereed Journal Articles:
[1] 'The Determination of the Real Exchange Rate: the Productivity Approach,' Journal of International Economics, 12 (1982), 355-362.
[2] 'Rational Expectations and Risk Premia in Forward Markets: Primary Metals in the London Metals Exchange,' with Nalin Kulatilaka, Journal of Finance, 37 (1982) 1199-1207.
[3] 'A Heteroscedasticity-Consistent Covariance Matrix Estimator for Time Series,' Journal of Econometrics, 22 (1983), 281-290.
[4] 'International Risk Sharing and the Choice of Exchange Rate Regime,' Journal of International Money and Finance, 3 (1984), 141-151. PDF file (last version before publication).
[5] 'Tests of Rational Expectations and No Risk Premium in Forward Exchange Markets,' Journal of International Economics, 17 (1984), 173-184. PDF file (last version before publication). One of the top 25 most cited papers in the JIE.
[6] 'Estimation of Response Probabilities from Augmented Retrospective Observations,' with Charles Manski and Daniel McFadden, Journal of the American Statistical Association, 80 (1985), 651-662. PDF file
[7] 'Choice of Inventory Accounting Method: a Ricardian Model,' with Jevons Lee, Journal of Accounting Research, 23 (1985), 468-485. Reprinted in Ray Ball and Clifford W. Smith (eds), The Economics of Accounting Policy Choice, New York: McGraw-Hill, 1992, 646-663. PDF file (last version before publication)
[8] 'An Exploratory Investigation of the Firm Size Effect,' with K.C. Chan and Nai-fu Chen, Journal of Financial Economics, 14 (1985), 451-471. PDF file (last version before publication)
[9] 'Portfolio Implications of Empirical Rejections of the Expectations Hypothesis,' with Leonardo Leiderman, Review of Economics and Statistics, 68 (1986), 680-684.
[10] 'Monte-Carlo Evidence on Adaptive Maximum Likelihood Estimation of a Regression,' with Charles F. Manski, The Annals of Statistics, 15 (1987), 541-551.
[11] 'The Profitability of Currency Speculation,' with John F.O. Bilson, International Journal of Forecasting, 3 (1987), 115-130.
[12] 'Statistical Properties of Daily Foreign Exchange Rates: 1974-1983,' Journal of International Economics, 24 (1988), 129-145. PDF file (last version before publication). One of the top 25 most cited papers in the JIE.
[13] 'Empirical Regularities in the Deutsche Mark Futures Options,' with Luis Manas-Anton, Advances in Futures and Options Research, 3 (1988), 183-208. PDF file (last version before publication)
[14] 'Testing for Nonlinear Dependence in Daily Foreign Exchange Rate Changes,' Journal of Business, 62 (1989), 339-368.
[15] 'Modeling Heteroskedasticity in Daily Exchange Rates,' Journal of Business and Economic Statistics, 7 (1989) 307-317. PDF file.
[16] 'Margin Regulation and Stock Market Volatility,' with Merton H. Miller, Journal of Finance, 45 (1990), 3-29. Reprinted in Lester Telser (ed), Margins and Market Integrity, Chicago: Probus Publishing Co, 1991, 319-364. PDF file (last version before publication)Winner of the Smith-Breeden First Prize in 1990.
[17] 'Implications of Observed Properties of Daily Exchange Rate Movements,' Journal of International Financial Markets, Institutions & Money, 1 (1991), 61-71. PDF file (last version before publication).
[18] 'Chaos and Nonlinear Dynamics: Application to Financial Markets,' Journal of Finance, 46 (1991), 1839-1877. PDF file (last version before publication). One of the 48 most cited papers published during 1990-1999 in the JOF.
[19] 'Estimating the Dynamics of Foreign Currency Futures,' with William Fung, Review of Futures Markets, 10 (1991), 490-514. PDF file (last version before publication).
[20] 'A Nonlinear Stochastic Rational Expectations Model of Exchange Rates,' Journal of International Money and Finance, 11 (1992), 235-250. PDF file (last version before publication).
[21] 'Implications of Nonlinear Dynamics for Financial Risk Management,' Journal of Financial and Quantitative Analysis, 28 (1993), 41-64. PDF file (last version before publication).
[22] 'Using Nonlinear Methods to Search for Risk Premia in Currency Futures,' Journal of International Economics, 35 (1993), 113-132. PDF file (last version before publication).
[23] 'Assessing Market Risks and Credit Risks of Long Term Interest Rate and Foreign Currency Products,' Financial Analysts Journal, 49 (1993), 75-79. PDF file (last version before publication).
[24] 'A New Approach to International Arbitrage Pricing,' with Ravi Bansal and S. Viswanathan, Journal of Finance, 48 (1993), 1719-1747. PDF file (last version before publication).
[25] 'Nonlinear Dynamics in Financial Markets: Evidence and Implication,' Financial Analyst Journal, 51 (1995), 55-62. PDF file (last version before publication).
[26] 'Global Yield Curve Event Risks,' with William Fung, Journal of Fixed Income, 6 (1996), 37-48. PDF file (last version before publication).
[27] 'Estimation of Stochastic Volatility Models with Diagnostics,' with Ron Gallant and George Tauchen, Journal of Econometrics, 81 (1997), 159-192. PDF file (last version before publication)Third most highly cited paper in the Journal of Econometrics in 1997.
[28] 'Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds,' with William Fung, Review of Financial Studies, 10 (1997), 275-302. Summary, Abstract, PDF file.
[29] 'Survivorship Bias and Investment Style in the Returns of CTAs,' with William Fung, Journal of Portfolio Management, 24 (1997), 30-41. Summary. PDF file (last version before publication).
[30] 'Is Mean-Variance Analysis Applicable to Hedge Funds?' with William Fung, Economic Letters, 62 (1999), 53-58. PDF file (last version before publication).
[31] 'A Primer on Hedge Funds,' with William Fung, Journal of Empirical Finance, 6 (1999), 309-331. PDF file (last version before publication).
[32] 'Performance Characteristics of Hedge Funds and CTA Funds: Natural Versus Spurious Biases,' with William Fung, Journal of Financial and Quantitative Analysis, 35 (2000), 291-307. PDF file (last version before publication).
[33] 'Measuring the Market Impact of Hedge Funds,' with William Fung, Journal of Empirical Finance, 7 (2000), 1-36. PDF file (last version before publication).
[34] 'The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers,' with William Fung, Review of Financial Studies, 14 (2001), 313-341. PDF file. Winner of the Fischer Black Memorial Foundation1999 Robert J. Schwartz Memorial Prizefor the best paper on hedge funds. [Earlier versions of this paper were titled: 'A Risk Neutral Approach to Valuing Trend Following Strategies', 'Nonlinear Dynamics of Trend Following Strategies'.]
[35] 'Benchmarks of Hedge Fund Performance: Information Content and Measurement Biases,' with William Fung, Financial Analyst Journal, 58 (2002), 22-34. PDF file (last version before publication).
[36] 'Asset-based Style Factors for Hedge Funds,' with William Fung, Financial Analyst Journal, 58 (2002), 16-27. PDF file (last version before publication).
[37] 'The Risk in Fixed-Income Hedge Fund Styles,' with William Fung, Journal of Fixed Income, 12 (2002), 6-27. PDF file (last version before publication).
[38] 'Hedge Fund Benchmarks: A Risk Based Approach,' with William Fung, Financial Analyst Journal, 60 (2004), 65-80. PDF file (last version before publication). [This paper received a CFA Institute Graham and Dodd Award of Excellence for 2004.]
[39] 'Extracting Portable Alphas from Equity Long-Short Hedge Funds,' with William Fung, Journal of Investment Management, 2 (2004), 57- 75. PDF file (last version before publication). Reprinted in H. Gifford Fong (ed.), The World of Hedge Funds: Characteristics and Analysis, New Jersey: World Scientific, 2005, 161-180.
[40] 'Will Hedge Funds Regress Towards Index-like Products?' with William Fung. Journal of Investment Management, 5, (2007), 46-65. PDF file (last version before publication).
[41] 'Hedge Funds: Performance, Risk and Capital Formation,' with William Fung, Narayan Naik, and Tarun Ramadorai, Journal of Finance, 63 (2008), 1777-1803. PDF file (last version before publication).[42] 'The Risk in Hedge Fund Strategies: Theory and Evidence from Long/Short Equity Hedge Funds,' with William Fung. Journal of Empirical Finance, 18 (2011), 547-569. PDF file (last version before publication).
[43] 'Exploring Uncharted Territories of the Hedge Fund Industry: Empirical Characteristics of Mega Hedge Fund Firms', with Daniel Edelman and William Fung, Journal of Financial Economics, 109 (2013), 734-748. PDF file (last version before publication).
[44] 'Hedge Fund Franchises', with William Fung, Narayan Naik, and Melvyn Teo, Management Science, forthcoming.
Book Chapters, Conference Volumes, Invited Papers:
[45] 'Gold in the Optimal Portfolio,' with John Huizinga, in Robert A. Aliber (ed.), The Reconstruction of International Monetary Arrangements, London: MacMillan Press, 1987, 212-261.
[46] 'On Fitting a Recalcitrant Series: the Pound/Dollar Exchange Rate, 1974-83,' with A. Ronald Gallant and George Tauchen, in William A. Barnett, James Powell, and George Tauchen (eds.), Nonparametric and Semiparametric Methods in Econometrics and Statistics, Proceedings of the Fifth International Symposium in Economic Theory and Econometrics, Cambridge: Cambridge University Press, 1991, 199-240.
[47] 'Exploiting the Interest Differential in Currency Trading', with William Fung and James Leitner, in Andrew W. Gitlin (ed.), Strategic Currency Investing: Trading and Hedging in the Foreign Exchange Market, Chicago: Probus Publishing Company, 1993, 260-286.
[48] 'Estimating the Dynamics of Volatility,' in Conference on Financial Innovation: 20 Years of Black/Scholes and Merton, Durham, NC: Fuqua School of Business, Duke University, 1993, 507-521. PDF file.
[49] 'Bid-Ask Spreads in Foreign Exchange Markets: Implications for Models of Asymmetric Information,' with Allan Kleidon, in J. Frankel, G. Galli, and A. Giovannini (eds), The Microstructure of Foreign Exchange Markets, Cambridge: National Bureau of Economic Research, 1996, 41-65. PDF file (last version before publication).
[50] 'Do Hedge Funds Disrupt Emerging Markets?,' with William Fung and Konstantinos Tsatsaronis, Brookings-Wharton Papers on Financial Services, 2000, 377-421. PDF file (last version before publcation).
[51] 'The Risks in Hedge Fund Strategies: Alternative Alphas and Alternative Betas,' with William Fung, in Lars Jaeger (ed), The New Generation of Risk Management for Hedge Funds and Private Equity Funds, London: Euromoney Institutional Investors PLC, 2003, 72-87. PDF file (last version before publication).
[52] 'The Search fo Alpha--Sources of Future Hedge Fund Returns,' CFA Institute Conference Proceedings Quarterly, 23 (2006), 78-89.[53] 'Hedge Funds: An Industry in Its Adolescence,' with William Fung. Federal Reserve Bank of Atlanta Economic Review, 91 (2006, Fourth Quarter), 1-33. PDF file.
[54] 'Hedge Fund Replication Strategies: Implications for Investors and Regulators,' with William Fung. Banque de France Financial Stability Review, 10 (2007, April), 55-66. PDF file.
[55] 'Measurement Biases in Hedge Fund Performance Data: An Update,' with William Fung. Financial Analyst Journal, 65 (2009, May/Jun), 36-38.
[56] 'Funds of Hedge Funds: Performance, Risk and Capital Formation 2005 to 2010,' with Daniel Edelman, William Fung, and Narayan Naik. Financial Markets and Portfolio Management, 26 (2012), 87-108. PDF file.Book Review:
[57] Review of: Chaos and Order in the Capital Markets: A New View of Cycles, Prices, and Market Volatility, by Edgar E. Peters (New York: John Wiley, 1991), Journal of Finance 48 (1993), 2041-2044.
Working Papers:
'Finite Sample Properties of the BDS Statistic,' with Blake LeBaron, 1988. Published as Chapter 2 and Appendices A, B, C, E, and F in Nonlinear Dynamics, Chaos and Instability: Statistical Theory and Economic Evidence, with William Brock and Blake LeBaron, Cambridge: MIT Press, 1991 (328 pages).
'Empirical Analysis of Implied Volatility: Stocks, Bonds, and Currencies,' with William Fung, 1991. PDF file.
'Performance Attribution and Style Analysis: From Mutual Funds to Hedge Funds,' with William Fung, 1996. PDF file. A condensed version of this paper is published as 'Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds' in the Review of Financial Studies (1997).
Invited Presentations Since 1997:
1997 | Apr 2: | Graduate School of Business, Stanford University. |
Apr 4: | Haas School of Business, University of California at Berkeley. | |
Apr 7: | The Berkeley Program for Finance. | |
Apr 15: | Graduate School of Business, University of Chicago. | |
Apr 16: | Kellogg School of Management, Northwestern University. | |
Apr 25: | Asset Pricing Workshop, National Bureau of Economic Research, Cambridge, MA. | |
Jun 18: | III Conference for Endowments and Foundations, Boston, MA. | |
Jun 25: | Managed Futures Association, First Annual Conference on Hedge Funds, New York. | |
Oct 22: | Sloan School of Management, Massachusetts Institute of Technology. | |
Dec 9: | Chicago Board Of Trade Winter Research Meeting, Chicago. | |
Dec 12: | Washington University at Seattle. | |
1998 | Mar 6: | Wharton Risk Management Conference, Wharton School of Business. |
Mar 12: | International Monetary Fund, Washington DC. | |
Mar 27: | Virginia Polytechnic Institute. | |
Mar 30: | Inquire Europe, Lausanne, Switzerland. | |
Mar 31: | Bank for International Settlement, Basle, Switzerland. | |
May 22: | Anderson School of Business, University of California at Los Angeles. | |
Oct 28: | Federal Reserve Bank of New York. | |
Oct 30: | Asset Pricing Workshop, National Bureau of Economic Research, Chicago. | |
Dec 11: | Trianagle Econometric Conference. | |
1999 | Jan 6: | Computational Finance 1999, New York. |
Jan 11,12: | Federal Reserve Bank of Chicago. | |
Feb 18: | University of Notre Dame. | |
Mar 10: | Risk Management Center of Chicago. | |
Sep 30: | University of Rochester. | |
Oct 8: | Washington University in Saint Louis. | |
Oct 14: | Carnegie-Mellon University. | |
Oct 29: | Brookings-Wharton Third Annual Conference on Financial Services. | |
Nov 11: | Princeton University. | |
Nov 18-20: | Conference: Research, Risk and Regulation in the Hedge Fund Industry, Durham, NC. | |
Nov 23: | International Monetary Fund. | |
2001 | Mar 20: | Berkeley Program for Finance. |
Oct 19: | Boston University. | |
Nov 7: | New York University. | |
Nov 30: | NBER, Risk of Financial Institutions. | |
2002 | Apr 12: | Vanderbilt University. |
Apr 26: | Boston College. | |
Jul 2: | Third Annual Hedge Funds in the Cotswolds, UK. | |
Jul 8: | Hedge Fund Symposium, London Business School. | |
Sep 23: | Inquire Europe, Stockholm (keynote speaker). | |
Sep 25: | Stockholm Institute for Financial Research. | |
Nov 19: | Commodity Futures Trading Commission. | |
2003 | Feb 20: | Greenwich Round Table. |
Mar 25: | Berkeley Program for Finance, San Diego, CA. | |
May 11: | AIMR, Phoenix, AZ. | |
May 14: | SEC, Hedge Fund Roundtable (written comments) | |
May 30: | Wharton Financial Institutions Center, Hedge Fund Conference. | |
Sep 25: | NYC Retirement Systems, Hedge Fund Seminar. | |
Oct 7: | AIMR, Conference on Integrating Hedge Funds Into a Private Wealth Strategy, Newport Beach, CA. | |
Oct 20: | The Q-Group, Fall 2003 Research Seminar: Hedge Fund Investing, Scottsdale, AZ. | |
Nov 7: | Georgia State University. | |
2004 | Oct 1: | University of California at Irvine. |
2005 | Feb 10: | State Street Associates Research Retreat, Cambridge, MA. |
Jun 9: | BSI Gamma Foundation & Bocconi University Conference, Hedge Funds: Moving into the Mainstream? Milan, Italy. | |
Sep 27 | IV. Forum Alternative Investments (keynote speaker), Bundesverband Alternative Investments, Frankfurt, Germany. | |
Sep 30 | IXIS-NYU Hedge Fund Conference, New York, NY. | |
Oct 28 | University of Massachusetts at Amherst, MA. | |
2006 | Feb 16 | CFA Institute, Hedge Fund Management 2006, Philadelpha, PA. |
Mar 10 | World Bank, Washington, DC. | |
Mar 30 | Georgia State University, Atlanta, GA. | |
Apr 21 | CFA Society of Chicago, 2006 Academic Research Conference, Chicago, IL. | |
Apr 27 | Harvard Law School, Capital Matters: Managing Labor's Capital Conference, Cambridge, MA. | |
May 17 | FRB of Atlanta, Financial Markets Conference 2006, Sea Island, GA. | |
Aug 15 | Northwestern University, Kellogg Hedge Fund Conference on 'Recent Research in Hedge Funds and Performance Measurement,' Evanston, IL. | |
Sep 18 | Journal of Investment Management, Fall Conference 2006. | |
Oct 25 | Global Absolute Return Congress, Boston. | |
Dec 1 | Wharton Impact Conference, Frontiers in Finance. | |
2007 | Mar 11 | Commonfund Forum 2007, Orlando, FL. |
Apr 15 | Panel Discussion on Hedge Funds, IMF, Washington, DC. | |
Apr 19 | Society of Actuaries, Investment Symposium, NY. | |
Sep 25 | University of Calgary. | |
Sep 27 | Chicago FRB/IMF, Globalization and Systemic Risk, Chicago, IL. | |
Oct 19 | Fifth Annual Global Absolute Return Congress, Boston, MA. | |
Oct 29 | Hedge Fund Replication and Alternative Beta, New York, NY | |
Oct 31 | Fourth Annual GAIM Fund of Funds, New York, NY | |
Nov 16 | GCMC Colloquium on Markets & Systemic Risk, Durham, NC | |
2008 | Apr 30 | Baruch College, New York, NY |
Oct 6 | JOIM Conference, Boston, MA | |
Nov 24 | Office of the Comptroller of the Currency, Washington, DC | |
2010 | Nov 19 | Oxford-Man Hedge Fund Conference, Oxford, UK |
2011 | Apr 5 | BAI Hedge Fund Conference, Frankfurt, Germany |
Apr 26 | Oberlin College, Oberlin, OH | |
Oct 18 | The Q Group Fall Conference, Dana Point, CA |
Interviews:
Plan Sponsor Magazine, Jul-Aug 1998, Q&A: Hedging for Diversification, by Gregory J. Millman. |
Business Leader, January 2006, 'Hedge Funds: Investing's Best Kept Secret,' by Brad Wyckoff. |
Barron's, March 27, 2006. 'Anyone Here Seen Alpha?' by Jack Willoughby. |
Institutional Money, Feb 2011, 'Große Hedgefonds bleiben groß' |
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Event-driven investing is an investing strategy that seeks to exploit pricing inefficiencies that may occur before or after a corporate event, such as a bankruptcy, merger, acquisition or spinoff.
To illustrate, consider what happens in the case of a potential acquisition. When a company signals its intent to buy another company, the stock price of the company to be acquired typically rises. However, it usually remains somewhere below the acquisition price—a discount that reflects the market’s uncertainty about whether the acquisition will truly occur.
That’s when event-driven investors enter the picture. An event-driven investor will analyze the potential acquisition—looking at the reason for the acquisition, the terms of the acquisition and any regulatory issues (such as antitrust laws)—and determine the likelihood of the acquisition actually occurring. If it seems likely that the deal will close, the event-driven investor will purchase the stock of the company to be acquired, and sell it after the acquisition, when its price has risen to the acquisition price (or greater).
Event-driven investing strategies are typically used only by large institutional investors, such as hedge funds and private equity firms. That’s because traditional equity investors, including managers of equity mutual funds, do not have the expertise necessary to analyze many corporate events. But that’s exactly how event-driven investors make money.
To illustrate, let’s go back to our example of a potential acquisition and consider how a traditional fund manager looks at the situation. Let’s say the manager holds the stock of the company that is to be acquired. When the planned acquisition is announced, the stock rallies (partly as a result of event-driven investors buying it). The traditional manager doesn’t have the expertise to determine if the deal will go through, so he or she will often sell the stock before the acquisition occurs, realizing a solid profit and sacrificing the remaining upside (that is, any additional profit that he or she would have realized by holding the stock until after the acquisition). That additional upside is locked in by the event-driven investor.
Event-driven investing is often used by investors who also use distressed-investing strategies. As explained in Investing in Distressed Securities, distressed securities are securities—most often corporate bonds, bank debt and trade claims—of companies that are in some sort of distress, such as bankruptcy. That’s because event-driven and distressed investing strategies may be complementary. Event-driven investing tends to work best when the economy is performing well (because this is when corporate activity is highest). Distressed investing, on the other hand, tends to work best when the economy is performing poorly (because this is when companies tend to become distressed).
While event-driven investing can be profitable, event-driven investors must be willing to accept some risk. Many corporate events do not occur as planned. This can ultimately reduce the price of a company’s stock and cause an event-driven investor to lose money. As a result, event-driven investors must have the knowledge and skill to accurately assess whether a corporate event will actually occur.
In summary, then, while a company subject to a complex event may not sound like a great investment opportunity, it could be—for sophisticated investors who have the expertise to evaluate the event and are willing to accept increased risk.
Get comprehensive and up-to-date information on 6900 + Hedge Funds, Funds of Funds, and CTAs in the Barclay Global Hedge Fund Database.