Investing Guide: Building an aggressive portfolio with Special Situation Funds

Investing Guide: Building an aggressive portfolio with Special Situation Funds
Nitin Raina
Investing in the stock markets revolves around buying and selling stocks for profit. Stock prices rise either due to fundamental factors of the business or due to market exuberance. However, seasoned investors take a more specialised approach known as special situation investing. Unlike the traditional methods, this unique approach involves identifying and capitalising on specific events or circumstances affecting a company's stock price.

These situations can range from mergers, acquisitions, spin-offs, bankruptcies, restructurings, to regulatory changes. By carefully analysing these unique scenarios and their potential impact on a company's value, evolved investors aim to profit from opportunities that may not be easily visible through conventional strategies. This approach requires a deep understanding of the financial markets, corporate finance, and often involves a higher level of risk and complexity compared to the standard stock investment strategies.

Understanding why special situations occur is crucial. Special situations often stem from temporary issues in a company, industry, or the economy, such as financial troubles, leadership changes, sector-specific challenges or regulatory shifts. .

Global events like political tensions or economic downturns can further add to the mix. When such situations arise, stock prices may correct sharply.. This creates opportunities for savvy investors to buy low and potentially earn returns as prices rebound. These opportunities can be attractive for investors looking for good deals or companies with potential for improvement. Special situations in equity investing offer unique chances to enhance portfolio gains by taking advantage of specific events or changes in companies.

Let’s take a look at some of the events which can create special situations:

Mergers and Acquisitions (M&A): When one company decides to buy another or merges with it, the respective stock prices of both companies can change. For instance, if there is confidence that the acquisition or merger will be successful and result in a higher valuation for the target company, investors may flock to buy its stock in anticipation of reaping the benefits once the deal is finalized. On the other hand, if there are doubts about the viability of the deal or concerns that the acquiring company is paying too much for the acquisition, investors may opt to sell off shares of the acquiring company to avoid potential losses.

Spin-offs: When a company splits a part of its business into a new independent entity, investors can evaluate this new company separately. If they believe it has strong growth prospects, they might buy its stock. Meanwhile, the parent company's stock might also see changes, offering opportunities for investors to profit if they correctly predict how the spin-off will affect the parent company's worth.

Turnaround Opportunities: If a company is struggling, but investors believe it can improve with changes in management or strategy, they might buy its stock while it is cheap. If the company successfully turns itself around, the stock price could rise, allowing investors to sell at a profit.

The need for expertise and strategy

To profit from special situations, investors must carefully study how these situations actually affect companies. This involves analysing aspects such as company finances, industry shifts, and potential risks essential for making informed decisions. Risks associated with special situation investing can significantly impact investment outcomes.

Regulatory uncertainties further pose challenges, as changes in laws or policies can affect company operations and profitability. Unexpected market reactions may lead to volatility, potentially affecting investment returns. Despite these challenges, thorough research and a comprehensive understanding of each situation can help investors identify potential opportunities for returns.

Hence, the special situation is a challenging proposition and requires a deep understanding of business and economic dynamics. For retail investors, it is best to seek guidance from professional fund managers specialising in such strategies. Those opting for investing in special situation funds should have an investment horizon of at least three years and more. Given the risk profile of the offering, it is largely suitable for aggressive investors. The spread out time frame augurs well for such investors seeking to capitalise on these market opportunities and gain returns over the long term.

Disclaimer: The article is authored by Nitin Raina, Founder at Agnit Finvest. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India. Do your own research (DYOR) before deciding to invest in any financial asset class. This article is published by the Insider Studios team. You can get in touch with them on