Hedge Funds, Tactical vs. Event-driven

Perhaps, the most famous tactical strategy hedge fund was the Quantum Fund founded by now-billionaire George Soros. The tactical strategy approach attempts to make gains on regional and marketing changing events that can vary from currencies, interest rates, commodities, and economies as well as other approaches. Capital managers specialize in one product or region or another. There are far too many variables to consider for one person to become successful with multiple approaches and could easily result in losses. These funds do not review individual companies stock performance or balance sheets but are more likely to analyze industry trends or calculable changes in securities markets. Investopedia

Event-driven strategies deal in corporate actions: (1) mergers and acquisitions, (2) stock splits, (3) issuances of distressed debt, and (4) financial insolvency. A trader who anticipates that a company offer might be rejected might decide to short-sell the target company stock. Target company deals without more than one bidder that are rejected usually results in a drop in stock price. Conversely, if information is gathered that a company is doing well and open to a takeover, a trader can buy “long” and profit from a sell of an increased stock price. If a company is short on working capital but doesn’t have much credit history, it must pay higher interest rates to finance debt. They typically have a “CCC” credit rating or lower. In this case, an event-driven hedge fund manager would buy the risky debt because the profits will far exceed that earned on interest payments on investment-grade corporate bonds. Event-driven strategies expand in a poor economy and contract in a strong economy. More companies, of course, do not perform well because of a weak economy. BarclayHedge

This is a simple comparison of two hedge fund strategies. I will introduce other popular strategies as well as provide other examples of manager strategies in my future posts on hedge funds. Thanks to all who have been reading my “Hedge Funds, Onshore vs. Offshore” OnShore vs. Offshore blog post from April 3rd!

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