Hedge funds are alternative investments that pool investors’ dollars and invest them into various financial instruments. Hedge fund strategies try to generate positive return, regardless of market direction by taking advantage of arbitrage opportunities, using long and short strategies and utilizing options, to name a few. Due to the flexibility of investment strategies that hedge funds are able to engage, they’re considered high risk and available only to accredited investors.
Hedge fund strategies are broad with various risk appetites and investment philosophies. These strategies utilize various investment instruments such debt, equity, commodities, currencies, derivatives, real estate and more! Below we’ll discuss the most common hedge fund strategies that portfolio managers may engage in.
Common Hedge Fund Strategies
- Global Macro
- Hedge funds that embrace a global macro strategy aim to make their investment decisions based on the political and economic outlook of various countries. This type of strategy would analyze the country’s economy and evaluate various economic trends. Currency traders and interest rate portfolio managers rely heavily on global macro strategies when managing their portfolios.
- Long & Short
- This is one of the most common used strategies and would involve establishing a long and short position in equities while utilizing derivative securities. Funds will tend to use fundamental and quantitative techniques when making investment decision. Typically, a fund will seek to take a long position in undervalued securities and short overvalued securities. Their investments tend to be publicly traded companies with a long-biased outlook.
- Market Neutral
- Market neutral funds aim to generate above market returns with lower risk. They’d typically hedge their bullish stock picks through the usage of options and short their bearish positions. The goal of market neutral funds are to keep low net exposure in comparison to the overall market.
- Merger Arbitrage
- Merger arbitrage funds aim to profit from the merger of two or more publicly traded companies. They aim to take advantage of price discrepancies that might occur before and after the merger. Typically, the company that is getting acquired, their stock price rises and the stock price of the acquiring company, falls.
- Convertible Arbitrage
- Convertible arbitrage aims to take a long position in a company’s convertible securities while at the same time, taking a short position in the company’s common shares. These strategies aim to exploit price inefficiencies between the convertible security and common shares.
- Capital Structure Arbitrage
- Capital structure arbitrage seeks to exploit price inefficiencies between the various security classes issued from the same company. Mispricing opportunities often happen between equity and debt issued securities.
- Fixed Income Arbitrage
- Fixed income strategies aim to exploit inefficiencies in fixed income securities. Typical strategies would include swap-spread arbitrage, yield curve arbitrage and capital structure arbitrage.
- Event Driven Arbitrage
- Event driven strategies seek to exploit pricing opportunities that may arise due to specific corporate events. This includes mergers, takeovers, reorganizations, restructuring, asset sales, spin-offs, bankruptcies and other events that may cause stock price inefficiencies.
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