Suppose you are a crisis manager worried about your public company’s falling stock price due to massive tort claims and/or regulatory changes. As you weigh options and public statements, consider this August 28, 2011 Financial Times article by Phil Davis. Mr. Davis’ article suggests that hedge funds are increasingly seeking out "event-driven" investing, such as taking short or long positions in companies facing mass tort claims or regulatory changes (or engaging in m & a events).
There are various unpleasant realities to "event-driven" investing. One is that crisis managers need to understand that some investors have absolutely no interest in the merits of a business or its defenses to litigation or regulation. Instead, they simply hope to use information better than others to make money as stock prices rise or fall based on perceptions (which may or may not have anything to do with reality).
Here are some excerpts from the article – the entire article is worth reading:
"Event-driven is one of the least recognised hedge fund strategies and yet, over the long term, 25 per cent of hedge fund assets are allocated to it. Its diversification benefits from mainstream indices are the principal reason for its prevalence in hedge fund portfolios.
Carl Ludwigson, associate director at Paamco, which runs a $10bn multi-strategy fund, says: “We see a move towards more event-driven strategies because they can extract idiosyncratic risk and less market-driven returns.
The event-driven strategy embraces bankruptcies, recapitalisations, spin-offs, asset sales, leadership transitions, litigation and regulatory changes. There are potentially thousands of strands, all of which have little correlation with broad share or bond benchmarks.
The number of investor surveys indicating that event-driven is at the top of many institutional investors’ shopping lists is a clear warning signal that overcrowding will continue. There are even exchange traded funds on the market that replicate the vanilla M&A arbitrage activities of event-driven funds."