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Event driven funds is a hedge fund investment strategy that seeks to exploit pricing inadequacies that may happen before or after a corporate event, for instance bankruptcy, merger or acquisition. It is mainly used by hedge fund managers that try and take advantage of events, resulting in temporary mispricing of a company’s stock.
Investors tend to become concerned when a company goes through a corporate reorganization, restructuring, merger or any other major events. This can lead to stock prices decreasing to the point which investors feel comfortable with its stability. When a hedge fund manager finds a potential investment they will examine the underlying value of the company and the situation surrounding the event. If the investors are positive about the event of the company, or they may buy shares to sell later when the prices change.
Event driven investing strategies tend to be used most by large institutional investors, like hedge funds and private equity firms. This is due to the fact that traditional equity investors will not have the correct expertise or access to the necessary information to thoroughly analyse the risks associated with these corporate events. This strategy was developed by Cornwall Capital and profiled in “The Big Short” by Michael Lewis.
According to Phillippe Ferreira of Lyxor Asset Management, of the healthcare sector, they have had a substantial exposure to event driven funds and by August 2015 they contributed roughly around 60% of event driven funds making it one of the strongest contributors. According to Dealogic, by August healthcare merges and acquisitions (M&A) were up to 42% with an ultimate high of around $422.8 billion in 2014 with the entire year being of around $429.3 billion setting a record.
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