Below is a list of some major hedge fund strategies:
Equity Hedge Long/Short
Fund of Funds
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.
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.
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 strategies used are primarily arbitrage
or hedging. Both strategies aim at returns with low or no correlation
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 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 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.
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.
This strategy aims to profit from price imbalances
resulting from a specific event or transaction - for example, merger,
hostile takeover, or leveraged buyout.
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.
Management Partners, Inc.
1100 North Fourth Street
Fairfield, Iowa 52556
Phone: 800-621-2520 / 641-472-8800
Contact CMP via email
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