Event-Driven Strategy Definition
A type of investment strategy that seeks to exploit pricing inefficiencies that may occur before or after a corporate event, such as a bankruptcy, restructuring, merger/acquisition, takeover or spinoff is known as an event driven strategy. The strategy is used once a stock mispricing is detected before or after a corporate event occurs.
Sophisticated investors such as hedge funds and private equity firms are the major users of this strategy. This is due to the lack of expertise of the traditional equity investors, including managers of equity mutual funds; or the lack of access to information needed to sufficiently analyze the risks associated with majority of these cooperate events.
A Little More on What is an Event Driven Strategy
There are various methods in which specialists hired by an investor can execute an event driven strategy, while aiming at taking advantage of temporary mispricings in the system. These specialists analyze effectively taking into consideration among other things, the current regulatory environment, possible synergies from mergers/acquisitions, and a new price target after the action has taken place; the effect of using this strategy before finally making a decision on how to invest based on the current stock price versus the likely price of the stock after the action takes place. This decision in turn, finally hidetermines whether the company will likely make money if correct, or make looses if incorrect.
Example of an Event Driven Strategy
An event-driven strategy can largely be related to the announcement of an acquisition, leading to a rise in the stock price of the target company. The probability of the acquisition occurring is largely dependent on the judgment of the team of specialists gotten from the situation analysis, based on the regulatory environment.
An acquisition loss may lead to a fall in stock price. Gain, on the other hand, will enable the team’s decision on the stock Price’s landing place. An investor may buy the shares of the target company to resell them if there is enough potential for upside; and an adjustment in the target company’s stock price.