Event Driven Hedge Funds Flashcards
What are events as they relate to Event driven hedge funds?
Events are corporate events like
m&a,
reorganizations,
bankruptcies
with substantial market price reaction to the securities related to the transactions.
What do Event driven fund managers do?
What is meant by corporate event risk?
They react quickly to capture risk premiums associated with new information related to special events.
Corporate event risk is risk that an unexpected corporate event substantailly changes the value of a stock.
What are the 2 views on how the event driven strategies can be viewed?
- Selling Insurance view, the economic prospect of earning relaively small risk premiums for protetion against large losses of unfavorable events, and
- Binary option view, Holding a long position in riskless Bond plus Long position in a Binary call option/ a short position in a Binary put option
What does an activist investment strategy involve?
It involves influencing shareholder voting rights to impact corporate governance.
What is Corporate governance?
The management and processes that control decisions of a corporation.
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What are the 3 steps to an activist investment strategy
- Identifying corporations that do not maximize shareholder wealth;
- Investing in positons that benefit from changes in corporate governance.
- Executing favorable corporate governance changes.
Identify, Invest, Execute
What is shareholder activism?
Th process of one or more shareholders opposing the recommendations of senior management.
What is proxy battle?
This involves a battle between the corporation’s current management and one or more shareholders to influence proxies or votes from shareholders in particular direction.
Who are the key players in financial activism
- Active initiators
- Active followers
- Passive followers
Active initiators are catalysts for change and pay the direct costs of activism.
Active followers are FREE RIDERS, they try to benefit without bearing any costs, but support active intiators.
Passive followers are existing shareholders who may either support activists ‘ proposlas as followers or oppose activists as pacifists.
Agency theory
Agency costs
The study of the relationship between principals (shareholders) and agents (management team)
All costs associated with conflicts of interests between shareholders and management
What is traditional merger arbitrage?
Traditional merger arbitrageurs use leverage to buy stock of the target firm and short sell stock in the acquiring firm
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What is the difference between a Chapter 7 Bankruptcy and a Chapter 11 Bankruptcy?
Chapter 7 bankruptcy results in liquidation
Chapter 11 Bankruptcy results in reorgnization
What is a naked call option?
Investor is short a call option and does not own the underlying asset.
What is the recovery rate of a Bond?
The amount of the face value that an investor receives following the bankruptcy proceedings
What is meant by capital structure arbitrage?
This refers to distressed debt securities.
It refers to holding a long position in relatively undervalued securities (senior debt or preferred stock) and a short position in relatively overvalued securities (junior debt or common stock), resulting in a hedged position of a single firm
