Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

Which of the following is least likely to be an event-driven hedge fund strategy?

1. Takes offsetting hedged positions in the shares of the target and acquirer based on the ratio of shares in a proposed merger.

2. Takes a position in a company's shares with the goal of participation in corporate governance.

3. Invests in bankrupt companies, seeking opportunities to realize a turnaround from sale of their securities based upon estimates of their recovery rates.

4. Invests in convertible bonds and preferred shares, determining whether to hold, trade or convert into common shares based upon a thorough analysis of company fundamentals.

The correct answer is: Invests in convertible bonds and preferred shares, determining whether to hold, trade or convert into common shares based upon a thorough analysis of company fundamentals.

The identification of the least likely event-driven hedge fund strategy centers on understanding the nature of event-driven investing. Event-driven strategies typically capitalize on specific events or corporate actions, such as mergers, acquisitions, bankruptcies, or significant corporate changes. In this context, the strategy that is least aligned with an event-driven approach is the one that involves investing in convertible bonds and preferred shares based on a thorough analysis of company fundamentals. This investment approach focuses on the analysis of the financial health and operations of the company without direct dependence on imminent corporate events or transactions that would create a price discrepancy driven by specific events. Investors in convertible bonds and preferred shares typically engage in a valuation-oriented approach, assessing achievable returns without necessarily responding to or anticipating corporate actions that create a specific event-driven opportunity. In contrast, the other options clearly represent events that drive the investment strategy directly. For instance, engaging in merger arbitrage involves making bets on the completion of a merger by taking positions in the stocks of the target and acquirer. Corporate governance participation directly relates to engaging in company policies and changes, often linked to events such as shareholder meetings. Investing in bankrupt companies is focused on a notable event—bankruptcy itself—where investors seek to profit from changes in firm value during the restructuring