Event-Driven Strategy
What is an Event-Driven Strategy?
An event-driven strategy is a type of investment strategy that endeavors to exploit transitory stock mispricing, which can happen before or after a corporate event happens. It is most frequently utilized by private equity or hedge funds since it requires essential aptitude to dissect corporate events for effective execution. Instances of corporate events incorporate restructurings, mergers/acquisitions, bankruptcy, side projects, takeovers, and others. An event-driven strategy takes advantage of the inclination of a company's stock price to endure during a period of change.
Understanding Event-Driven Strategies
Event-driven strategies have different methods of execution. In all circumstances, the goal of the investor is to exploit brief mispricings brought about by a corporate reorganization, restructuring, merger, acquisition, bankruptcy, or another major event.
Investors who utilize an event-driven strategy utilize groups of experts who are specialists in dissecting corporate actions and deciding the effect of the action on a company's stock price. This analysis incorporates, in addition to other things, a gander at the current regulatory environment, potential collaborations from mergers or acquisitions, and another price target after the action has occurred. A decision is then made about how to invest, in view of the current stock price versus the logical price of the stock after the action happens. Assuming the analysis is right, the strategy will probably bring in money. Assuming the analysis is mistaken, the strategy might cost money.
Illustration of an Event Driven Strategy
The stock price of a target company ordinarily rises when an acquisition is announced. A skilled investigator group at an institutional investor will judge whether the acquisition is probably going to happen, in view of a large group of factors, like price, regulatory environment, and fit between the services (or products) offered by the two companies. On the off chance that the acquisition doesn't occur, the price of the stock might endure. The expert group will then, at that point, conclude the reasonable landing place of the stock price assuming the acquisition occurs, in light of a careful analysis of the target and securing companies. Assuming there is sufficient potential for upside, the investor might buy shares of the target company to sell after the corporate action is complete and the target company's stock price changes.
Features
- Instances of corporate events incorporate mergers and acquisitions, regulatory changes, and earnings calls.
- Generally investors have groups of experts who dissect corporate actions according to numerous points of view, before suggesting action.
- An event-driven strategy alludes to an investment strategy where an institutional investor endeavors to profit from a stock mispricing that might happen during or after a corporate event.
