I published another article at The Balance: Considering Event-Driven Investing. This is one place where writing in the third person leaves a lot out. I’ve done a lot with some types of event-driven investing.
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Q2 hedge fund letters, conference, scoops etc
- Speculating on hurricanes — I did that successfully at the hedge fund 2004, 2005 and 2006. 2006 because I thought the risk of another strong hurricane year was overplayed. 2004 and 2005 because I had a good idea of who was underreporting claims after disasters. That was the only time in my life that I went from long a company to short without stopping, and I covered on the day the CEO resigned, and caught the bottom tick.
- Bond deal arbitrage — well, sort of. I would buy target company bonds and sell the bonds of the parent. I had to be certain that the deal would go through, but it was a tremendous yield enhancement is the right situations.
- From the prior article, speculating on Lula’s non-impact on Brazil qualifies as event-driven.
- Stock arbitrage — did a lot with it when I was younger. Didn’t do so well.
- Index arbitrage — did a neutral trade where we shorted one company out of the Russell 2000, and bought another one in. Made no money on the trade. We had a good fundamental justification for the trade, but it just goes to show you that this isn’t as easy as it looks.
- I buy a decent number of spinoffs. Most succeeded as investments for me.
Now, all that said, most areas where there are simple arbitrages typically boil down to a simple credit risk: will the deal get completed? Will the company not take an action that changes its capital structure in a way that hurts me?
Since these are relatively simple trades, the returns are relatively low like that on a short-term junk bond — at present, like the yield on T-bills plus 2-3%. It’s not very compelling given the risks involved. Most of the mutual funds that do that type of arbitrage have not done so well.
Thus, aside from spinoffs, at present, I don’t do that much with event-driven investing. Many of the forms of it are too crowded, and I prefer simplicity in investing.
Article by David J. Merkel, CFA, FSA - The Aleph Blog