Higher for Longer: Event-Driven Investing in a Normalized Interest-Rate Environment 

The challenges for hedge funds over the last decade are well known. But with interest rates holding higher for longer, they are operating on a different playing field, which means an entirely different opportunity set and risks. In this series we seek to pinpoint exactly where these opportunities are and how investors can capture them. First up: event-driven investing.

Monetary policy seeks to serve as a throttle control on the economy. Lower interest rates are expected to encourage credit expansion and risk-taking through cheaper financing and lending. Leaders are encouraged to pursue expansion, growth and acquisitions, and the relative cost of capital supports debt as the funding source. When the cost to borrow remains extremely low for long periods, this compounds nearly unabated and with less accountability, as the hurdle for return on capital remains suppressed.

This has been the case for the past decade of global zero-interest policy (ZIRP) and easy refinancing conditions suppressing defaults, starving event-driven investors of opportunities. But as policy has tightened and interest rates have risen, many of the dynamics present in a low-rate cycle are in reverse.

Capital allocation and risk/reward reset, accountability comes under scrutiny and eventually assets change hands. This expansion and contraction, commonly known as the business cycle, may often lead to corporate action, principally in the form of balance sheet optimization and debt refinancings, but secondarily in buybacks, spin-offs, split offs and mergers, to name a few. 

_{Source: Bloomberg, as of 30 June 2025.}

We believe this new regime of higher-for-longer interest rates may serve as an accelerant for distressed opportunities as the ramifications of higher rates are felt. Which may create both explicit and implicit tailwinds for event-driven and multi-strategy hedge funds to potentially capitalize on.