A special situation in finance is an atypical event which has the potential to alter the future course of a business, materially impacting the company's value. The notion covers corporate restructuring and corporate transactions such as spin-offs, share repurchases, security issuance/repurchase, asset sales, or other catalyst-oriented situations. A conflict of shareholders is also considered a special situation.
To take advantage of special situations, a hedge fund manager must identify an upcoming event that will increase or decrease the value of the company's equity and equity-related instruments.
Generally, the special situations investing is considered to be a subclass of alternative investments. Special situations are very risky and challenging as businesses go not as usual. They require specialized expertise; determining the best price can be difficult. In addition, profits are far from assured, because prices might increase as more money chases deals. Therefore, such situations are monitored and sought after by hedge funds, for they provide interesting investments opportunities. Private equity funds and other institutional investors also do special situation investments as part of their strategies.
There is also a definition of special situation by Benjamin Graham:
First, just what is meant by a "special situation"? Convention has not jelled sufficiently to permit a clear-cut and final definition. In the broader sense, a special situation is one in which a particular development is counted upon to yield a satisfactory profit in the security even though the general market does not advance. In the narrow sense, you do not have a real “special situation” unless the particular development is already under way.
Classes of special situations
- Class A: Standard arbitrages, based on a reorganization, recapitalization or merger plan
- Class B: Cash payout, in recapitalization or mergers
- Class C: Cash payments on sale or liquidation
- Class D: Litigated matters
- Class E: Public utility breakups
- Class F: Miscellaneous special situations