Event-driven hedge funds profit from corporate events — mergers, spin-offs, bankruptcies, earnings surprises. Merger arb buys the target after a deal announcement; distressed debt buys bonds of troubled companies at discounts.
Answer: Buy the acquisition target trading below the offer price. Post-announcement, the target trades at a discount to the offer — arbs capture this spread if the deal closes.
Answer: Buying bonds of financially troubled companies at cents on the dollar. Distressed investors buy debt at deep discounts, betting on recovery — either through restructuring or liquidation.
Answer: A company separates a business unit into an independent public company. Spin-offs often unlock hidden value — the new independent entity can be valued and managed separately.
Answer: Institutional investors often sell immediately regardless of value, creating opportunity. Index funds and large institutions often dump spin-offs immediately (too small, wrong sector) — creating attractive entry points for value investors.
Practice this with $10,000 in virtual cash in Tradecraft, free paper trading with real market data.
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