During these events, stock prices are mainly driven by the event and not by the market. An event-driven manager evaluates the probability of the event and the outcome of the event. Thus, he needs knowledge of how the security will behave depending on the outcome of the event.
In addition, fast and reliable access to information is required. Therefore, most eventdriven managers are specialized in certain industries. The most popular event-driven strategies are distressed securities investing and risk arbitrage. The latter usually includes merger arbitrage and special situations.
The distressed securities strategy identifies firms in financial or operational distress, usually linked with extreme price losses. Specialized in pricing securities in such extreme events, managers buy adequate stocks or bonds. Some managers practice an active strategy and take a hand in reorganizations while others follow a passive buy and hold strategy.
Merger arbitrage is usually based on the empirical observation that stocks of the target rise after an announcement because of a premium included in the bid price. While some invest on the basis of rumors before the bid, others bet after the bid on the outcome.
Special situations include rearrangements of stock indices, spin-offs, and share buybacks, for example, when a stock enters a big index, empirically there is a high probability of a price increase. The same is true when a share buyback is announced. At spin-offs, situations of negative stub values are of special interest.