What Is Event-Driven Credit Investing?
Event-driven credit investing, sometimes called special situations credit investing, is an alternative investment strategy that seeks to capitalize on specific corporate events or situations that impact the value of a company’s credit instruments. These idiosyncratic events include, but are not limited to, corporate restructurings, bankruptcies, spin-offs, mergers, tender offers, significant litigation, initial and seasoned debt/equity offerings, new product launches, regulatory catalysts, analyst meetings, earnings announcements, covenant issues, shareholder activism, management changes, geopolitical events, or other external factors.
Rather than trying to predict broad market moves, event-driven credit investors aim to generate returns by identifying mispriced credit securities tied to anticipated events. This type of strategy is rooted in deep credit analysis, legal restructuring expertise, and the ability to navigate complex or dislocated situations that traditional credit investors often try to avoid.
What are the benefits of Event-Driven Credit strategies?
1. Diversification
Traditional 60/40 portfolios tend to be heavily influenced by interest rates, inflation, and market sentiment. Event-driven credit strategies are not driven by the broader macro market; they are typically tied to company-specific outcomes. The non-correlated return nature of these strategies can reduce portfolio volatility and may provide ballast in tough market environments.
2. Alpha Generation
Unlike traditional investments that rely largely on market returns (beta), event-driven credit funds seek to generate
alpha
. Alpha measures the risk-adjusted returns driven by manager skill in sourcing, structuring, and timing trades around corporate events. Ultimately, the success of these strategies depends on fundamental research and expertise, not just market momentum.
3. Unique Institutional Access
Event-driven credit strategies access parts of the market that are avoided or often unavailable to traditional stock or bond investors. For example, while many traditional credit strategies focus on income generation and avoiding defaults, an event-driven credit fund might buy deeply discounted debt from a company in default and seek to earn asymmetric returns from a favorable restructuring of that company.
4. Resilience in Volatile Markets
In rising rate environments or times of economic uncertainty, traditional bonds and equities often suffer. Event-driven credit strategies, especially when focused on stressed or distressed debt, may be less sensitive to rate changes or macro trends, since these idiosyncratic situations often have binary, event-based outcomes.
Risks to Evaluate
- Manager Experience & Skill: Investment success heavily relies on the fund manager’s ability to pick the right opportunities. Additionally, market access to some deals may only be available to managers with broad relationships and trusted experience by other market participants.
- Liquidity: Funds that invest in event-driven credit often have lock-up periods or limited redemption windows, reducing flexibility for investors to redeem out of the strategy immediately. However, semi-liquid structures align nicely with the strategy to allow both illiquid and longer horizon investments to be pursued by the managers.
- Event Risk: If anticipated events fail to materialize, returns could suffer. Managers with deep experience are preferred, especially those with a history of working to preserve capital on trades that do not go to plan.
How does Event-Driven Credit fit in a portfolio?
An event-driven credit strategy could be a core alternative and a strong contributor in nearly any portfolio.
Using the Efficient Frontier framework, we plotted the risk/return profile of simple traditional portfolio concepts in RED (100% Stocks, 60% Stocks/40% Bonds, 100% Bonds) compared to portfolios with increasing allocations to Event-Driven Credit added to the traditional 60/40 portfolio mix in Blue (10%, 20%, 30%, 40%) .
| Traditional Portfolios | Event-Driven Credit Portfolios |
|---|---|
| 100% Stocks | 55% Stocks/35% Bonds/10% Event-Driven Credit |
| 60% Stocks/40% Bonds | 50% Stocks/30% Bonds/20% Event-Driven Credit |
| 100% Bonds | 45% Stocks/25% Bonds/30% Event-Driven Credit |
| 40% Stocks/20% Bonds/40% Event-Driven Credit |
The 7-year risk and return chart below shows dramatically elevated risk-adjusted returns as the allocation to Event-Driven Credit increased. We believe this illustrates the strategy’s effectiveness as a diversifier to a traditional portfolio of stocks and bonds.
Source: Morningstar. 7-Year Annualized Return Data from 5/09/2018 to 5/31/2025. All information is historical and for illustrative purposes only. Past performance does not guarantee future results.
The Sharpe and Sortino Ratio chart below demonstrates Event-Driven Credit’s potential value in a diversified portfolio. The Sharpe ratio measures the average return earned over the risk-free rate per unit of volatility, while the Sortino ratio is similar but focuses only on downside volatility. When comparing Event-Driven Credit, the Event-Driven Credit Portfolios, and Traditional Portfolios, the Sharpe and Sortino Ratios increase commensurately with each incremental weighting to Event-Driven Credit, further emphasizing the potential value of incorporating Event-Driven Credit into a diversified investment portfolio.
Source: Morningstar. 7-Year Annualized Return Data from 5/09/2018 to 5/31/2025. All information is historical and for illustrative purposes only. Past Performance does not guarantee future results.
Sharpe Ratio: A measure of historical risk-adjusted performance calculated by dividing the fund’s excess returns over a risk-free rate by the standard deviation of those returns. The higher the ratio, the better the fund’s return per unit of risk.
SortinoRatio: The Sortinoratio is a variation of the Sharpe ratio that differentiates harmful volatility from total overall volatility by using the asset’s standard deviation of negative portfolio returns deviation, instead of the total standard deviation of portfolio returns.
As the allocation to Event-Driven Credit increases from 10% to 40%, the portfolios demonstrate improved risk-adjusted returns, suggesting that the unique characteristics of Event-Driven Credit investments can enhance the overall efficiency of the portfolio. The low correlation of Event-Driven Credit strategies with traditional asset classes, combined with the potential for asymmetric risk/reward profiles, contributes to this improvement in risk-adjusted performance.
7 years is a relatively short time period, but investable vehicles for the broader public have really only been available over this time period. Prior to the increased development of interval and tender offer funds, only “hedge funds” and similar private fund vehicles were available that deployed this strategy in a dedicated way. While the time frame is limited, the analysis provided by Destra highlights the potential benefits of including Event-Driven Credit as a core alternative investment in a diversified portfolio. By allocating a portion of any portfolio to an Event-Driven Credit strategy, investors may be able to capitalize on unique credit opportunities while potentially enhancing risk-adjusted returns and diversification.
Methodology: Different allocations of MSCI ACWI GR, Bloomberg Global Aggregate Bond TR, and the BlueBay Destra International Event-Driven Credit Fund (CEDIX)*.
The allocations as pictured in the above two charts were assembled as follows:
Individual Holdings
Bonds
= Bloomberg Global Aggregate Bond TR
Stocks
= MSCI ACWI GR
Event-Driven Credit
= BlueBay Destra International Event-Driven Credit (CEDIX)
Allocations without Event-Driven Credit
STOCKS = 100% Stocks, 0% Bonds
60-40 = 60% Stocks, 40% Bonds
BONDS = 0% Stocks, 100% Bonds
Allocations with Event-Driven Credit
55-35-10 = 55% Stocks, 35% Bonds, 10% Event-Driven Credit
50-30-20 = 50% Stocks, 30% Bonds, 20% Event-Driven Credit
45-25-30 = 45% Stocks, 25% Bonds, 30% Event-Driven Credit
40-20-40 = 40% Stocks, 20% Bonds, 40% Event-Driven Credit
Event-Driven Credit = 0% Stocks, 0% Bonds, 100% Event-Driven Credit
Conclusion
Event-driven credit strategies could offer an attractive complement to traditional portfolios. By focusing on company-specific catalysts rather than broad market trends, they can provide meaningful diversification, potential alpha, unique access, and resilience during macroeconomic stress.
For long-term investors comfortable with illiquidity and complexity, adding a thoughtfully selected event-driven credit allocation might help build a more robust, all-weather portfolio.
To learn more about how Event-Driven Credit strategies may help elevate your portfolio construction process, please give us a call at 877-855-3434 or visit our website at www.destracapital.com.
Risks and Other Important Considerations
This material is being provided for informational purposes only. The author’s assessments do not constitute investment research and the views expressed are not intended to be and should not be relied upon as investment advice. This blog and the statements contained herein do not constitute an invitation, recommendation, and solicitation or offer to subscribe for, sell or purchase any securities, investments, products or services. The opinions are based on market conditions as of the date of writing and are subject to change without notice. No obligation is undertaken to update any information, data or material contained herein. The reader should not assume that all securities or sectors identified and discussed were or will be profitable.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THERE IS NO GUARANTEE THAT ANY FORECASTS MADE WILL COME TO PASS. DUE TO VARIOUS RISKS AND UNCERTAINTIES, ACTUAL EVENTS, RESULTS OR PERFORMANCE MAY DIFFER MATERIALLY FROM THOSE REFLECTED OR CONTEMPLATED IN ANY FORWARD-LOOKING STATEMENTS. THERE CAN BE NO ASSURANCE THAT ANY INVESTMENT PRODUCT OR STRATEGY WILL ACHIEVE ITS OBJECTIVES, GENERATE PROFITS OR AVOID LOSSES. DIVERSIFICATION DOES NOT ENSURE PROFIT OR PROTECT AGAINST LOSS IN A POSITIVE OR DECLINING MARKET.
All investments carry a certain degree of risk including the possible loss of principal. Complex or alternative strategies may not be suitable for everyone and the value of any portfolio will fluctuate based on the value of the underlying securities.
There are substantial risks and conflicts of interests associated with Credit, Event-Driven, Special Situations and Stressed investments, and you should only invest risk capital. Special situation investments are speculative and involve a substantial degree of risk. The level of analytical sophistication, both financial and legal, necessary for successful investment in distressed assets is unusually high. Therefore, the strategy will be particularly dependent on the analytical abilities of the Advisers. In any reorganization or liquidation proceeding relating to a company in which a strategy invests, the strategy may lose its entire investment, may be required to accept cash or securities with a value less than the original investment and/or may be required to accept payment over an extended period of time. Generally, the success of an event-driven strategy depends on the success of the prediction of whether the anticipated corporate event occurs or a successful outcome is achieved as a result of the event. Investing in or seeking exposure to companies in anticipation of an event carries the risk that the event may not happen or may take considerable time to unfold, it may happen in modified or conditional form, or the market may react differently than expected for the event, in which case the strategy may experience loss or fail to achieve a desired rate of return. Special Situations strategies may be subject to substantial charges for management and advisory fees. Past results are not necessarily indicative of future results. Mutual funds involve risk including possible loss of principal. An investment in an alternatives strategy mutual fund should only be made after careful study of the prospectus, including the description of the objectives, principal risks, charges, and expenses of the fund.
Notes to Hypothetical Portfolio Performance
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, THEREFORE, YOU MAY HAVE A GAIN OR LOSS WHEN YOU LIQUIDATE AN INVESTMENT. PRIOR YEAR AND YEAR TO DATE PERFORMANCE NUMBERS ARE NOT INDEPENDENTLY VERIFIED, AND ARE SUBJECT TO CHANGE, UNTIL COMPLETION OF AN AUDIT. THERE ARE SUBSTANTIAL RISKS ASSOCIATED WITH AN INVESTMENT IN SPECIAL SITUATIONS, AS SUMMARIZED ELSEWHERE IN THIS BLOG.
The historical hypothetical portfolio performance for the Event-Driven Credit Portfolios contains the indices listed above and the BlueBay Destra International Event-Driven Credit Fund (CEDIX). Inception Date for the Fund was 5/09/2018. No hypothetical back tested returns were used, only historical return data. The historical hypothetical portfolio performance for the 60/40 portfolio uses actual benchmark returns for the given portfolio construction percentages with a monthly rebalance: 60% MSCI ACWI TR Index; 40% Bloomberg Global Aggregate Bond Index. The historical hypothetical portfolio performance information for the Event-Driven Credit and 60/40 portfolios have been obtained or derived from sources believed by Destra Capital Advisors LLC to be reliable, but Destra does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor does Destra recommend that the information herein serve as the basis of any investment decision or trading program.
This blog is solely intended for informational purposes and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments.
Index Descriptions and Risks
It is not possible to invest directly in any index or benchmark. Indices and benchmarks do not reflect commissions or fees that might be charged to a similar investment product if actually acquired. Such commissions or fees are likely to materially affect the performance data presented by an index or benchmark. The following indices have been used in the presentation for informational and illustrative purposes only.
60/40 Portfolio: Hypothetical portfolio constructed as follows using actual benchmark returns. 60% MSCI ACWI Index; 40% Bloomberg Global Aggregate Bond Index; rebalanced monthly
MSCI ACWI Index – measures the equity market performance of the world’s developed and emerging markets.
Bloomberg Global Aggregate Bond TR Index - measures performance of the global developed investment grade government and corporate bond market.