Sitting in the back seat, you wonder how you got into a conversation about an event-driven hedge fund with the Uber driver. “What are special situations hedge funds?” she asks. Arriving at your destination, you delay exiting the car to tell her this …

What are Special Situations Hedge Funds?

Special situations hedge funds are investment vehicles that capitalize on the market opportunities that arise from corporate actions. These investment situations are unique to the general market conditions and require intricate event-driven strategies to profit from their occurrence. Let’s look at the characteristics and strategies germane to these funds to properly address, what are special situations hedge funds?

Event-Driven Opportunities – Corporate actions are event-driven opportunities initiated by companies to either profit, satisfy regulatory requirements, or stave off a pending bankruptcy. The event may be a merger, acquisitions, spin offs, spin outs, restructuring, or tender offers, to name a few. Bankruptcies and litigation-induced changes are considered event-driven corporate actions, as well.

Arbitrage – Price discrepancies occur during mergers, acquisitions, and restructurings, and special situations hedge funds seek to exploit the spread. This arbitrage strategy can also be applied to commodities, interest rates, bonds, real estate, and currencies.

Tender Offers – Special situations hedge funds seek to leverage their expertise to capitalize on the corporate event of tender offers. A tender offer is a company’s public proposal to purchase a significant number of a target firm’s outstanding shares, usually at a premium to the current market price, to gain control of the target company. This highly profitable strategy is known as tender offer arbitrage.

Distressed Investing – Special situations hedge funds hunt for companies experiencing financial distress or facing bankruptcy. The fund positions itself to profit from the fiscally challenged firm’s potential recovery, favorable restructuring, or inevitable liquidation.

Turnaround Investing – Firms that are undergoing significant financial or operational challenges yet have the potential of reversing and improving their fortunes, are desired investment targets for special situations hedge funds.

What are special situations hedge funds? These funds are an avenue for event-driven investors to gain exposure to an often-overlooked corner of investing which has oversized profit potential and pays a regular dividend. But there’s more …

Divestitures – A very profitable pursuit of these funds is investing in companies spinning off or divesting subsidiaries and divisions. Corporate divestitures often unlock a subsidiary’s unrecognized value hidden under the parent company’s corporate umbrella.

Regulatory Catalysts – Special situations funds profit from stock price gyrations caused by positive or adverse regulatory and/or legal decisions.

Activist Investing – A common objective of special situations hedge funds is activist investing. The fund seeks to acquire a substantial equity stake in a target firm to influence growth initiatives, draft governance policies, shape transaction structures and contribute strategic input geared to increasing and unlocking shareholder value.

What are special situations hedge funds? Special situations hedge funds are investment funds with high return potential and commensurate risk. The fund identifies profitable special situations events by conducting in-depth research and analysis and employing diversification of investment sector, industry, and geographics as a risk mitigation strategy.

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