This strategy is defined as equity oriented investing designed to capture price movements generated by an anticipated corporate event. There are three popular sub-categories in event-driven strategies:
Specialists invest simultaneously in long and short positions in both companies involved in a merger or acquisition. Risk arbitrageurs are typically long in the stock of the company being acquired and short in the stock of the two companies. The principal risk is deal risk, should the deal fail to close. In this instance, individual equity options could be used to mitigate some of the risk and enhance potential returns.
This strategy is exploited by investing in the convertible securities of a company. A typical investment is to be long in the convertible bond and short in the common stock of the same company, which also isolates the convertible option value. Positions are designed to generate profits from the fixed income security as well as the short sale of stock, while protecting the principal from market movements. Exchange traded interest rate futures such as the Euro Bund Future, the Euro Bobl Future and the Euro Schatz Future could be used to hedge the fixed income element of the trade and individual stock options to hedge the option value.
Believing that equities behave in a mathematically describable manner, managers can implement a low-risk, market-neutral analytical equity strategy. This approach captures momentary pricing aberrations in the securities being monitored. The strategy’s profit objective is to exploit mispricings in as risk-free a manner as possible. Eurex sector futures and/or Exchange Traded Funds (ETFs) could also be used as a way of capturing sector anomalies or as a general hedge to neutralize sector exposures.