Hedged Tender

First, a little about tender offers These attempts to acquire stock involve buying a bunch of shares at a set price. A buyer puts out a general call: "I'm going to buy 2 million shares of Doc Chicken's Famous Frier Palace Inc. at $25 a share." The tender offer will then only go through if the buyer gets a commitment from other investors of the 2 million shares. If only 1.5 million shares get offered, the offer is revoked and no shares change hands.

Often, these tenders are used as a way of gaining control of a company or buying it outright.

A hedged tender is a strategy that creates a safety valve in case the tender goes south. The investor can make money either way.

In this strategy, an investor will submit some of their holdings in the tender, while shorting another portion of it. If the tender fails, the stock will likely fall in response, allowing the investor to make money on the short.

You own 2,000 shares of Doc Chicken's. You commit 1,000 shares in the tender. If the offer goes through, you get $25,000...$25 times your 1,000 shares.

Meanwhile, the price of the stock jumped to $24.95 following the announcement of the tender offer. You short the other 1,000 shares, meaning you sell the shares into the open market (rather than committing them to the tender).

News comes out that the tender couldn't reach its 2 million share goal. The stock drops to to $22.95, where you cover your short. You weren't able to get $25,000 from the tender offer like you hoped. But you did make $3,000 off the short...$3 a share for the 1,000 shares. And you still have your 2,000 shares.