While the mechanics of event arbitrage, or event-driven investing may be unfamiliar to some, this video produced by the Quaker Event Arbitrage Fund earlier this year does an excellent job of explaining the strategy.
Event-driven funds, like the Quaker Event Arbitrage Fund, invest in companies that are undergoing corporate events such as mergers, bankruptcies, and proxy fights. When these events are announced, the share price of the companies typically rises (or falls) in anticipation of the event, but there’s always a chance the event won’t go through. This allows investors an “arbitrage” opportunity, by buying the stock after the announcement of the event but before its completion, in the expectation of receiving a premium upon the event concluding.
These events are binary – they either happen or they don’t; so investing in a diversified portfolio of events can provide “equity-like returns” with less risk.