Final answer:
A merger or risk arbitrage fund is a type of hedge fund that employs an event-driven strategy, aiming to profit from corporate events like mergers and acquisitions. Event-driven funds are distinct from equity market-neutral funds, convertible arbitrage funds, and high-yield bond funds, which have different objectives and strategies.
Step-by-step explanation:
Hedge funds employ various strategies to achieve return on investment for their clients. One such strategy is the event-driven approach, which focuses on taking advantage of price movements caused by specific events such as mergers, acquisitions, and other significant corporate actions. Of the choices given, a merger or risk arbitrage fund is the type of hedge fund that typically uses an event-driven strategy.
This strategy involves taking positions in companies that are involved in mergers and other corporate events, with the expectation that the event will lead to an opportunity for profit. For example, in the case of a merger, an event-driven fund may buy shares of the target company if they believe the price will increase upon completion of the merger, or they may attempt to capitalize on the price discrepancies that can arise from the uncertainty surrounding the success or the terms of the merger.
In contrast:
- An equity market-neutral fund aims to neutralize market risk by holding long and short positions in equities, trying to gain profits from the spread between these positions.
- A convertible arbitrage fund looks to exploit pricing inefficiencies between a convertible bond and the stock into which it can be converted.
- A high-yield bond fund primarily invests in bonds with lower credit ratings, aiming to earn higher yields given the associated higher risk.