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Types of Hedge Fund Strategies

Below is a list of some major hedge fund strategies:

Convertible Arbitrage
Distressed Securities
Emerging Markets
Market Neutral
Market Timing
Futures
Equity Hedge Long/Short
Event Driven
Global Macro
Fund of Funds

Convertible Arbitrage

This strategy seeks to profit from the pricing of the embedded option in a convertible bond. Often used is a long, convertible position with a corresponding short position in the underlying stock. Varying degrees of leveraged are employed with this strategy.

Distressed Securities

This strategy invests in illiquid debt and/or equity of firms in or near bankruptcy in order to profit from a potential recovery. Generally, no leverage is used.

Emerging Markets

Investment in securities by businesses and/or countries with developing economies is used in this strategy. Some emerging market countries include Brazil, China, India, and Russia. The major emerging market areas are Latin America, Eastern Europe, Asia, and the Pacific Rim. Various asset classes with different strategies are used.

Market Neutral

Market neutral strategies used are primarily arbitrage or hedging. Both strategies aim at returns with low or no correlation to stocks.

Arbitrage may be divided into merger arbitrage, relative value arbitrage, convertible arbitrage, fixed income arbitrage, and capital structure arbitrage. Arbitrage strategies attempt to take advantage of price discrepancies between paired securities.

Hedging involves investing in securities, both long and short, with the goal of low net market exposure. Long positions that are undervalued and short positions that are overvalued are selected. In theory, this mitigates market volatility.

Market Timing

Market timing strategies switch among various asset classes to time price movements in different markets. Stocks, bonds, mutual funds, and money market funds are some of the asset classes used.

Futures

Futures are financial contracts for buying or selling a financial or physical commodity (e.g., currencies, stock indexes, heating oil) at a future date. Long and short futures contracts can act to hedge aspects of many fund portfolios. High levels of leverage are often involved in futures.

Equity

Hedge Long/Short Long and short equity securities positions are taken in this strategy. The overall portfolio may have either a long or a short bias. Equity hedge long/short relies on superior stock selection. Typically, a low degree of leverage is used. This strategy is one of the most popular in terms of the number of hedge funds and amount of money under management.

Event Driven

This strategy aims to profit from price imbalances resulting from a specific event or transaction - for example, merger, hostile takeover, or leveraged buyout.

Global Macro

An opportunistic, "top-down" approach is implemented by managers using this macroeconomic strategy. Trades are based upon major changes in the global economy, including interest rates and currencies, as well as changes in the economic policies of specific countries. Macro strategies use moderate amounts of leverage.

Fund of Funds

The fund invests in other hedge funds rather than directly in stocks, bonds, or other securities. Hedge funds utilized may be of similar strategies, such as equity hedge long/short; or the hedge funds employed may have different strategies. Generally, funds of funds are less volatile than single manager funds.

Sources:
Barclay Trading Group, Ltd.
Hedge Fund Research, Inc.
BARRA RogersCasey

 

RISK DISCLOSURE

WHEN CONSIDERING ALTERNATIVE INVESTMENTS YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS USE LEVERAGE AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

WITH RESPECT TO ALTERNATIVE INVESTMENTS IN GENERAL, YOU SHOULD BE AWARE THAT:

  • RETURNS FROM SOME ALTERNATIVE INVESTMENTS CAN BE VOLATILE.

  • YOU MAY LOSE ALL OR PORTION OF YOUR INVESTMENT.

  • WITH RESPECT TO SINGLE MANAGER PRODUCTS THE MANAGER HAS TOTAL TRADING AUTHORITY. THE USE OF A SINGLE MANAGER COULD MEAN A LACK OF DIVERSIFICATION AND HIGHER RISK.

  • MANY ALTERNATIVE INVESTMENTS ARE SUBJECT TO SUBSTANTIAL EXPENSES THAT MUST BE OFFSET BY TRADING PROFITS AND OTHER INCOME. A PORTION OF THOSE FEES IS PAID TO CAPITAL MANAGEMENT PARTNERS, INC.

  • TRADING MAY TAKE PLACE ON FOREIGN EXCHANGES THAT MAY NOT OFFER THE SAME REGULATORY PROTECTION AS US EXCHANGES.
WITH RESPECT TO AN INVESTMENT IN A FUND, YOU SHOULD BE AWARE THAT:
  • THERE IS OFTEN A LACK OF TRANSPARENCY AS TO THE FUND'S UNDERLYING INVESTMENTS. AS TO FUND OF FUNDS, THE FUND'S MANAGER HAS COMPLETE DISCRETION TO INVEST IN VARIOUS SUB-FUNDS WITHOUT DISCLOSURE THEREOF TO YOU OR TO US.  BECAUSE OF THIS LACK OF TRANSPARENCY, THERE IS NO WAY FOR YOU TO MONITOR THE SPECIFIC INVESTMENTS MADE BY THE FUND OR TO KNOW WHETHER THE SUB-FUND INVESTMENTS ARE CONSISTENT WITH THE FUND'S HISTORIC INVESTMENT PHILOSOPHY OR RISK LEVELS.

  • A FUND OF FUNDS INVESTS IN OTHER FUNDS AND FEES ARE CHARGED AT BOTH THE FUND AND SUB-FUND LEVEL.  THUS THE OVERALL FEES YOU WILL PAY WILL BE HIGHER THAT YOU WOULD PAY BY INVESTING DIRECTLY IN THE SUB-FUNDS.  IN ADDITION, EACH SUB-FUND CHARGES AN INCENTIVE FEE ON NEW PROFITS REGARDLESS OF WHETHER THE OVERALL OPERATIONS OF THE FUND ARE PROFITABLE.

  • THERE IS NO SECONDARY MARKET FOR FUND INTERESTS.  TRANSFERS OF INTERESTS ARE SUBJECT TO LIMITATIONS.  THE FUND'S MANAGER MAY DENY A REQUEST TO TRANSFER IF IT DETERMINES THAT THE TRANSFER MAY RESULT IN ADVERSE LEGAL OR TAX CONSEQUENCES FOR THE FUND.
A FUND'S OFFERING MATERIALS OR A MANAGER'S DISCLOSURE DOCUMENT DESCRIBES THE VARIOUS RISKS AND CONFLICTS OF INTEREST RELATING TO AN INVESTMENT AND TO ITS OPERATIONS.  YOU SHOULD READ THOSE DOCUMENTS CAREFULLY TO DETERMINE WHETHER AN INVESTMENT IS SUITABLE FOR YOU IN LIGHT OF, AMONG OTHER THINGS, YOUR FINANCIAL SITUATION, NEED FOR LIQUIDITY, TAX SITUATION, AND OTHER INVESTMENTS.

KEEP IN MIND THAT THE PAST PERFORMANCE OF ANY INVESTMENT IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.  YOU SHOULD ONLY COMMIT RISK CAPITAL TO A FUND INVESTMENT.  ALTERNATIVE INVESTMENT PRODUCTS, INCLUDING HEDGE FUNDS, ARE NOT FOR EVERYONE AND ENTAIL RISKS THAT ARE DIFFERENT FROM MORE TRADITIONAL INVESTMENTS.  YOU SHOULD OBTAIN INVESTMENT AND TAX ADVICE FROM YOUR ADVISERS BEFORE DECIDING TO INVEST.

CAPITAL MANAGEMENT PARTNERS, INC. (CMP) HAS ENTERED INTO SELLING AGREEMENTS WITH SOME OF THE FUNDS DESCRIBED ON THIS WEBSITE, PURSUANT TO WHICH IT IS PAID FEES BY THE FUND OR ITS MANAGER IN CONNECTION WITH FUND SALES MADE BY CMP. IN ADDITION, CMP MAY ACT AS AN INTRODUCING BROKER FOR INDIVIDUALLY MANAGED FUTURES ACCOUNTS AND TO SOME OF THE FUNDS AND AS SUCH, MAY RECEIVE A PORTION OF THE COMMODITY BROKERAGE COMMISSIONS THEY PAY IN CONNECTION WITH THEIR FUTURES TRADING OR RECEIVE A PORTION OF THE INTEREST INCOME (IF ANY) EARNED ON AN ACCOUNT'S ASSETS.  CERTAIN CTAS MAY ALSO PAY CMP A PORTION OF THE FEES THEY RECEIVE FROM ACCOUNTS INTRODUCED TO THEM BY CMP.  BEFORE SEEKING ANY ADVISOR'S SERVICES OR MAKING AN INVESTMENT IN A FUND, INVESTORS MUST READ AND EXAMINE THOROUGHLY THE RESPECTIVE DISCLOSURE DOCUMENT OR OFFERING MEMORANDUM.

 Information presented on this site has been obtained from sources that CMP believes to be reliable.  However, CMP has not and cannot verify the accuracy of such information, and potential investors should be aware that such information is subject to change without notice.  Not all products and services described on this website are available in all jurisdictions, and certain investments may not be suitable for all investors.  Certain investment products that are available to U.S. persons have not been registered with any federal or state regulator, and as a result are available only to certain qualified investors.  Qualifications vary from product to product.

Any information on this website referring specifically to investment products offered by CMP is only available to view by qualified persons with a username and password, which can be obtained by registering and qualifying.  By registering you understand that CMP may, at its sole discretion, send you information (electronically or otherwise) on various products it offers that it believes are suitable for you and you expressly consent thereto.  You may notify CMP in writing, at any time to remove your name from its product distribution list.  The information on this website should not be construed as investment advice.  You should obtain independent investment and tax advice before deciding to invest.

Past results are not indicative of future results.  There is risk of loss when investing in managed futures or funds.

The information contained in this website may not be reproduced, reorganized or used to create a financial product including an index.  This information is for informational purposes only and is provided on an "as is" basis.  The user assumes the entire risk of its use.  CMP expressly disclaims all warranties of originality, merchantability, of fitness for any particular purpose.  Without limiting the foregoing, in no event will CMP or employees have any liability in connection with the use by any person of the information or data presented in this website.

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Capital Management Partners, Inc.
1100 North Fourth Street
Suite 141
Fairfield, Iowa 52556
Phone: 800-621-2520 / 641-472-8800
Fax: 641-472-7320
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