What is an Event-Driven Strategy?

An event-driven strategy is a type of investment strategy that attempts to take advantage of temporary stock mispricing, which can occur before or after a corporate event takes place. It is most often used by private equity or hedge funds because it requires necessary expertise to analyze corporate events for successful execution. Examples of corporate events include restructurings, mergers/acquisitions, bankruptcy, spinoffs, takeovers, and others. An event-driven strategy exploits the tendency of a company's stock price to suffer during a period of change.

Key Takeaways

  • An event-driven strategy refers to an investment strategy in which an institutional investor attempts to profit from a stock mispricing that may occur during or after a corporate event.
  • Generally investors have teams of specialists who analyze corporate actions from multiple perspectives, before recommending action.
  • Examples of corporate events include mergers and acquisitions, regulatory changes, and earnings calls.

Understanding Event-Driven Strategies

Event-driven strategies have multiple methods of execution. In all situations, the goal of the investor is to take advantage of temporary mispricings caused by a corporate reorganization, restructuring, merger, acquisition, bankruptcy, or another major event.

Investors who use an event-driven strategy employ teams of specialists who are experts in analyzing corporate actions and determining the effect of the action on a company's stock price. This analysis includes, among other things, a look at the current regulatory environment, possible synergies from mergers or acquisitions, and a new price target after the action has taken place. A decision is then made about how to invest, based on the current stock price versus the likely price of the stock after the action takes place. If the analysis is correct, the strategy will likely make money. If the analysis is incorrect, the strategy may cost money.

Example of an Event Driven Strategy

The stock price of a target company typically rises when an acquisition is announced. A skilled analyst team at an institutional investor will judge whether or not the acquisition is likely to occur, based on a host of factors, such as price, regulatory environment, and fit between the services (or products) offered by both companies. If the acquisition does not happen, the price of the stock may suffer. The analyst team will then decide the likely landing place of the stock price if the acquisition does happen, based on a careful analysis of the target and acquiring companies. If there is enough potential for upside, the investor may buy shares of the target company to sell after the corporate action is complete and the target company's stock price adjusts.