Roy Behren and Michael Shannon of Westchester Capital Management discuss the differences between merger-arbitrage and event-driven investment strategies in this video. The firm runs merger-arb and event-driven funds, and Mr. Behren says the merger-arbitrage fund is more conservative, with a lower standard deviation, historic returns that are a bit lower, and a beta of 0.1.
The event-driven fund, by contrast, is a bit more aggressive and has a beta of slightly above 0.2. The event-driven fund employs several sub-strategies, including merger-arbitrage, and structures investments so they’ll be successful if the particular corporate event – be it a merger, spinoff, reorganization, transformation, asset sale, or litigation – plays out as expected. This hedges out directional risk, but since “broken deals” are always a risk, event-driven investing is best applied across multiple names – Westchester typically invests in 60-70 at a time – rather than 4 or 5 high conviction plays.
Where does activist investing fit in? Mr. Shannon explains that Westchester doesn’t engage in activist investing, but activists can and do trigger events that Westchester can play; and Mr. Behren adds that Westchester is not opposed to taking the side of activists. But Westchester doesn’t speculate; it only enters plays on publicly announced corporate events.
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