Chapter 18 CAIA Flashcards - Event Driven Hedge Funds

Question 1

Event Driven Hedge Funds

Answer 1

The event-driven category of hedge funds includes activist hedge funds, merger arbitrage funds, and distressed securities funds, as well as special situation funds and multistrategy funds that combine a variety of event-driven strategies. Event-driven hedge funds speculate on security price movements during both the anticipation of and the realization of events.

Question 2

Long Binary Call Option

Answer 2

A long binary call option makes one payout when the referenced price exceeds the strike price at ​expiration and a lower payout or no payout in all other cases.

Question 3

Long Binary Put Option

Answer 3

A long binary call option makes one payout when the referenced price exceeds the strike price at ​expiration and a lower payout or no payout in all other cases.

Question 4

Proxy Battle

Answer 4

A proxy battle is a fight between the firm’s current management and one or more shareholder activists to obtain proxies (i.e., favorable votes) from shareholders.

Question 5

Five Dimensions of Shareholder Activism

Answer 5

FINANCIAL VERSUS SOCIAL ACTIVISTS

ACTIVISTS VERSUS PACIFISTS

INITIATORS VERSUS FOLLOWERS

FRIENDLY VERSUS HOSTILE ACTIVISTS

ACTIVE ACTIVISTS VERSUS PASSIVE ACTIVISTS

Question 6

Free Rider

Answer 6

A free rider is a person or entity that allows others to pay initial costs and then benefits from those expenditures.

Question 7

Agency Theory

Answer 7

Agency theory studies the relationship between principals and agents.

Question 8

Principal-Agent Relationship

Answer 8

A principal-agent relationship is any relationship in which one person or group, the principal(s), hires another person or group, the agent(s), to perform decision-making tasks.

Question 9

Form 13D

Answer 9

Form 13D is required to be filed with the Securities and Exchange Commission (SEC) within 10 days, publicizing an activist’s stake in a firm once the activist owns more than 5% of the firm and has a strategic plan for the firm.

Question 10

Toehold

Answer 10

progress. A toehold is a stake in a potential merger target that is accumulated by a potential acquirer prior to the news of the merger attempt becoming widely known.

Question 11

Wolf Pack

Answer 11

A wolf pack is a group of investors who may take similar positions to benefit from an activists’ engagement with corporate management.

Question 12

Spin Off

Answer 12

A spin-off occurs when a publicly traded firm splits into two publicly traded firms, with shareholders in the original firm becoming shareholders in both firms.

Question 13

Split Off

Answer 13

A split-off occurs when investors have a choice to own Company A or B, as they are required to exchange their shares in the parent firm if they would like to own shares in the newly created firm.

Question 14

Merger Arbitrage

Answer 14

Merger arbitrage attempts to benefit from merger activity with minimal risk and is perhaps the best-known event-driven strategy.

Question 15

Stock for Stock Mergers

Answer 15

Stock-for-stock mergers acquire stock in the target firm using the stock of the acquirer and typically generate large initial increases in the share price of the target firm.

Question 16

Antitrust Review

Answer 16

An antitrust review is a government analysis of whether a corporate merger or some other action is in violation of regulations through its potential to reduce competition.

Question 17

Recovery Value

Answer 17

The recovery value of the firm and its securities is the value of each security in the firm and is based on the time it will take the firm to emerge from the bankruptcy process and the condition in which it will emerge.

Question 18

Capital Structure Arbitrage

Answer 18

Capital structure arbitrage involves offsetting positions within a company’s capital structure with the goal of being long relatively underpriced securities, being short overpriced securities, and being hedged against risk.

Question 19

Event Driven Multistrategy Funds

Answer 19

Event-driven multistrategy funds diversify across a wide variety of event-driven strategies, participating in opportunities in both corporate debt and equity securities.

Question 20

Special Situation Funds

Answer 20

Special situation funds invest across a number of event styles and are typically focused on equity securities, especially those with a spin-off or recent emergence from bankruptcy.