With remote in-hand, you’ve flipping through channels on a random Wednesday. An investment opportunity interests you and the terms “event driven and time driven” were mentioned. But what is an event driven strategy? And what is event vs time driven?
What is Event vs Time Driven?
In finance, event and time driven are different investment strategies with distinct characteristics. To answer the question, what is event vs time driven? more detail is needed, so let’s review each approach.
What is an Event Driven Strategy?
An event driven strategy capitalizes on a company-induced, specific event which impacts the firm’s securities, assets, and debt. These corporate actions can include spin-offs, mergers and acquisitions, liquidations, divestitures, bankruptcies, and regulatory changes.
Corporate actions manifest into the executable strategies of merger arbitrage, activist investing, distressed securities investing, and special situations investing.
Special situations investors analyze and capitalize on the mispricing and asset and debt undervaluation these events uncover. They take a position in the affected security with the researched expectation their investment will materialize into a capital gains outcome.
Successful event driven investing requires comprehensive research, thorough analysis, sector, and industry familiarity, along with asset class expertise shrink-wrapped in a knowledgeable market trend extrapolation.
What is a Time Driven Approach to Investing?
Time driven investing follows a methodical approach based on a predetermined schedule for making investment decisions over time.
Passive or systematic investing is often used to describe this strategy because of the automated decision-making preference to achieving consistent investment participation and results over time. Predetermined asset allocation strategies, dollar-cost averaging and pre-set portfolio rebalancing intervals are examples of time driven investing.
Certain time driven strategies mirror index investing, an investment approach offering passive investor management, portfolio diversification, long-term investing horizons, and seeks to replicate the performance of the broader market.
We would be remiss in our effort to address the question, what is event vs time driven? if the pros and cons were not mentioned. Here are a select few and not a comprehensive list by any stretch.
Pros: Event Driven Strategy
Above-Average Return Potential
The strategy can produce substantial returns due to the compounding effect of short-term holding periods and low correlation dependency on market trends.
Risk Management
Diversification and hedge strategies are germane to this investment approach. These tools are used to mitigate downside risks and bullet-proof permanent invested capital and subsequent gains.
Cons: Event Driven Strategy
Complexity
Event driven investment theses can be complex and transaction execution complicated. The inherent unknown outcome of any corporate event makes risk assessment akin to financial fortune-telling, at best.
Illiquidity
Distressed debt and bankruptcy securities may be thinly traded making position entry and exit difficult.
Pros: Time Driven Approach
Cost-Effectiveness
The cost-effective low management fees and miniscule transaction costs due to less portfolio turnover, add to the passive index investing comparison.
Reduced Market-Timing Risk
When the need to time corporate events or predict price movements is removed, market-timing is irrelevant. Time driven investing offers this attribute.
Cons: Time Driven Approach
Inflexibility
Time driven investors can miss short-term opportunities when market movements veer from long-term expectations. The strategy lacks market adaptability to take advantage of potential short-term gains.
Inflation Risk
This approach touts fixed capital allocation over an extended period. Inflation can erode the purchasing power and the real investment returns.
What is event vs time driven? The strategies have their merits and disadvantages and it’s the investor’s investment selection, risk profile, and industry and market outlook that are the discriminating criteria. An investor would be wise to incorporate both approaches within her investment thesis.
