Special Situation Investing: Turning challenges into profitable opportunities

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Special Situation Investing: Turning challenges into profitable opportunities
Arun M Alangar
As the world grapples with uncertainty, given the scale of global conflicts, economies under duress etc, individuals are increasingly focused on protecting their future and wealth. Special Situation Investing emerges as a strategic approach to capitalise on unique opportunities during these complex times.
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What is special situation investing?



Special situation investing refers to an investment strategy that aims to profit from specific events or situations affecting a company’s stock price. These events could include mergers and acquisitions, restructurings, bankruptcies, spin-offs, or other significant developments. Mutual funds following this theme invest in fundamentally strong companies facing temporary setbacks, anticipating their recovery as the challenges get addressed over time.

Transforming challenges into opportunities



Various scenarios, stemming from temporary crises within companies, sectors, economies, or governmental actions, alongside regulatory policies, global events, or uncertainties, can all serve as potential opportunities for special situation investing. Skilled fund managers adept at analysing these situations can understand such investment windows, identify undervalued assets and decipher the ramifications of these events. These rare opportunities are characterised by a limited window of time during which they offer attractive valuations.

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Special situation fund falls under the thematic category. While categorised as a thematic fund, a special situation fund is not limited to specific sectors or themes but has the flexibility to invest across all sectors and market capitalisations. Such funds endeavour to profit from temporary drops in prices, often having a brief window of opportunity. This investment approach is based on a bottom-up stock picking style, as its core strategy revolves around identifying companies experiencing special situations.

Unlike other mutual funds, it actively seeks out unique events, positioning themselves to benefit from potential market mispricing. The saying "when you seek opportunities, you find opportunities, and when you seek hurdles, you find hurdles' ' encapsulates the proactive approach of special situation funds in identifying and leveraging unique investment opportunities. Fund managers using this strategy conduct thorough analysis to identify opportunities where the market has not fully priced in the potential outcome of a special situation. As a result, the risk involved is higher and so are the returns, if they make the right call.

Who should consider investing?



Investors with a long term horizon and patience can consider investing in special situation funds. Patience is of essence as sometimes the turnaround aspect may require a longer time to play out. Given the nature of the offering, investors may opt for a systematic investment plan (SIP) with a long-term perspective for consistent and disciplined investing. Investors may consider including these funds in a satellite portfolio to diversify risk and boost their returns.

In conclusion, a special situation fund can be a good addition to the equity portion of your portfolio but as with any other investment one should approach this with a long term perspective.
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Disclaimer: The article is authored by Arun M Alangar, Managing Partner at Fortune Investment Centre. 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 insiderstudios@businessinsider.in.
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