Chartered Financial Analyst Level 2

Explanation

Investors with lower risk tolerance should prefer event-driven hedge funds that undertake a hard-catalyst approach (Option B). Here's why:

Understanding Event-Driven Hedge Fund Strategies:

Hard-Catalyst Approach:

• Involves investing in situations where a specific corporate event has already been announced or is highly likely to occur
• Examples include announced mergers, acquisitions, spin-offs, or restructurings
• Lower risk because the catalyst event is already known or imminent
• More predictable outcomes and shorter investment horizons
• Better suited for risk-averse investors

Soft-Catalyst Approach:

• Involves investing in anticipation of potential corporate events that haven't been announced
• Higher risk because the catalyst event may not materialize
• Requires more speculation and longer holding periods
• Less predictable outcomes

Investing in Anticipation of Announcements:

• This is essentially a soft-catalyst approach
• Higher risk as the event may not occur as expected
• Not suitable for risk-averse investors

Risk Considerations:

• Hard-catalyst strategies provide more certainty about the investment outcome
• The event timeline and potential returns are more predictable
• Lower volatility and reduced downside risk
• Better alignment with conservative investment objectives

Therefore, for investors with lower risk tolerance, hard-catalyst event-driven hedge funds offer the most appropriate risk-return profile.