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What Is an Event-Driven Strategy?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 04 September 2016
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An event-driven strategy is one that is employed by managers of corporations or other types of experienced investors. This sort of investment strategy is distinguished by others because it is precipitated by an occurrence that indicates to the investor that the securities of such a company are worth investing in. The reason why the company might be worth investing in at that particular time is usually due to the fact that the event foreseen by the investor will serve as a force that sets forth a chain of events, including a change in the value of the securities of such companies. A dip in the securities will form a disparity between the value of such a security now and the expected rise in the security after the event that caused the dip has been corrected.

An example of an occurrence that could lead to the application of an event-driven strategy is something like the preparation by a company to declare bankruptcy. This will serve as a sort of marker for investors who may see this as a prime opportunity to invest in the securities of such a company at the point when its value has fallen to a low. Later on, when the company has turned around, the value of the securities will rise and the investors will show a profit. As such, the event-driven strategy here was preceded by the hint of the coming bankruptcy, which was the event.

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Another example of a case where an event-driven strategy can be used is during the liquidation of a company. The investor could use the same indicators to predict the possibility of making a profit from any investment in such a company. By studying the market environment in which that particular company is operating in relation to other established micro and macroeconomic factors, it is usually possible to make an educated guess as to the future behavior of any investment in such companies. Other examples of instances where an event-driven strategy may be applied is in the case of an upcoming merger between companies or a takeover bid of one company by another, whether hostile or not. The type of investment that the investor chooses to make during an event-driven strategy is also based on the predictions regarding the future behavior of such an investment and the intention of the investor, meaning the investment may be short-term or long-term.

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