Event-driven investing is a popular strategy among investors, and some of the most famous event-driven investors include Bill Ackman, Carl Icahn, Warren Buffett, and George Soros.
Trading Strategies
December 24, 2022
Event-driven investing is an investment strategy that focuses on identifying and capitalizing on certain types of events or catalysts in order to make a profit trading stocks. It is a popular strategy among investors, and some of the most famous event-driven investors include Bill Ackman, Carl Icahn, Warren Buffett, and George Soros. They use strategies such as merger arbitrage, distressed debt investing, and activist investing to outperform the market. In this blog, we discuss event-driven investing, some of the most famous event-driven investors, how day traders can use event-driven strategies to outperform the market, and some tips for day traders using these strategies.
Bill Ackman is an American hedge fund manager and investor who founded the hedge fund Pershing Square Capital Management. He is one of the most famous event-driven investors, and his most famous trades include his investments in Burger King, Target, and Corning. Ackman uses event-driven strategies such as merger arbitrage and activist investing to capitalize on certain events in order to make a profit. He is credited as having made one of the greatest trades of all time when he turned $27 million into $2.5 Billion shorting the market in March 2020 when Covid-19 rattled markets.
Other famous event-driven investors include Carl Icahn, Warren Buffett, and George Soros. Each of these investors has had success using event-driven strategies to outperform the market.
The top performing event-driven strategies include merger arbitrage, distressed debt investing, and activist investing. Some of the top performing hedge funds that focus on event-driven stock strategies are Pershing Square Capital Management, Icahn Capital Management, and Soros Fund Management.
Hedge funds devote about 12% of their assets to event-driven investing, which is sometimes called swing trading. These types of investments can account for the outsized financial returns the top hedge funds produce, as well as the gains hedge funds often are able to produce during market sell offs and bear markets.
Bear markets - markets defined as operating with prolonged price declines of 20% or more - create notoriously difficult times to make money as a long-term investor in stocks. Event-driven stock investing works well in bear markets because investors are able to capitalize on small, short term price movements and avoid exposure to longer term negative selling trends. Investors able to produce 3- 4% gains from just a handful of short term event-driven changes to stock prices will outperform the broader stock market indexes by 200% or more during bear markets on an annual basis.
Taking into account the money kept out of the market during bear markets further accelerated the gains an event-driven investor can achieve, relative to the broader market. The graph below shows the gains and losses a stock investor would achieve had he/she sold before major market sell offs or simply held onto their stocks and absorbed the downward price movements.
As depicted in the analysis, missing the major selloffs generates 700% higher gains than simply holding through the entire 46 year period. This happens because it requires a greater increase in price, percentage-wise, to recover from market sell offs. For example, a stock that loses 10 percent in value has to rise 11.1% to recover in price. A stock that loses 50% in value must rise 100% in price to recover in full value. As a result, recovering from steep losses requires a much longer time period than losing value. That’s why markets are often said to go up an escalator but down an elevator (straight down).
In a bull market, event-driven investing can work even more effectively, as the increase in investor participation and sentiment can make price swings on news events more pronounced.
Day traders can use event-driven strategies such as merger arbitrage, leadership changes, layoffs, and product launches to capitalize on certain events in order to make a profit. Some tips for day traders using event-driven strategies include researching potential investments thoroughly, diversifying portfolios, and having a plan for when to exit trades.
Buying stocks on news of an event then selling that position in a short time (days, weeks, or months) eliminates the risk of the stock being negatively impacted by other geo-political events, legislation, competitors, or poor company financial performance. On an annualized basis, event-driven investing is the most profitable of all trading strategies. Event-driven investors can lock in short term profits ranging from 10 to 500% in just a few months, which, when gains are annualized, can outperform the broad market indexes by 10 to 50 times.
The difficulty of event-driven investing is knowing when to enter and exit positions. For this, hedge funds that engage in event-driven investing do extensive research, modeling, and backtesting to determine how to maximize profits while minimizing risk.
Non-professional investors can mimic these efforts if they have the time to do the data entry and spreadsheet analyses needed to create viable forecasts. The process involves listing out a large group of events on a spreadsheet, adding columns of stock price movements for the equities to determine typical price movement patterns in response to events, adding and analyzing companies by their sector and financials, and accounting for macroeconomic conditions. For an individual investor, the process would take 2 to 3 months to analyze a single type of event.
Given the labor involved in this process, many investors have either avoided doing the heavy work, opted to follow charting patterns instead, or have adopted the use of artificial intelligence tools like LevelFields.ai to perform all of the event-driven analysis, event detection and event alerting automatically.
Event-driven investing is a popular strategy among investors and day traders alike. Some of the most famous event-driven investors include Bill Ackman, Carl Icahn, Warren Buffett, and George Soros. They use strategies such as merger arbitrage, distressed debt investing, and activist investing to outperform the market. Day traders can also use these strategies to make a profit if they are able to identify the right opportunities and execute their trades correctly. It is important for day traders to research potential investments thoroughly, diversify their portfolios, and have a plan for when to exit trades in order to be successful with event-driven strategies.
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