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Event-driven investing

Strategies whose payoff depends on a corporate event completing or failing, such as a merger, spin-off, restructuring, index change or capital raise.

The common feature is that the outcome is determined by a process with a timetable rather than by general market direction. That makes returns relatively uncorrelated in normal conditions and highly correlated in crises, when deals break and financing disappears together.

Sub-strategies include merger-arbitrage, distressed debt and restructurings, spin-off investing, and activist positions where the investor creates the event themselves. Each requires legal and documentation work as much as financial analysis.

Position sizing dominates because payoffs are asymmetric: a deal that closes returns a few percent, while a deal that breaks can cost twenty or more. Event books are usually diversified across many situations for exactly this reason.

Related: merger-arbitrage, distressed-debt, hedge-fund, convertible-arbitrage, rights-issue, deal-spread

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

How a position size is worked outAccount size, risk per trade and stop distance feed into one box giving the number of shares.ACCOUNT SIZE$25,000your capitalRISK PER TRADE1%of the accountSTOP DISTANCE$0.50entry to stopPOSITION SIZE500 sharesrisk budget: $25,000 × 1% = $250position size: $250 ÷ $0.50 = 500 shares
Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.

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