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List of 9 Most Common Hedge Fund Strategies of All Time

9 Hedge Fund Strategies You Need to Be Familiar With

Which Hedge Fund Tactics Fit Your Investment Philosophy and Job Interests the Best? Let’s Take a Look at the Most Common Hedge Fund Strategies to See Whether One Is Right for You.

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Hedge funds are a type of alternative investment that takes advantage of market possibilities. They demand a higher initial lump sun than many other types of investments, and they are often only available to authorized investors.

To have a long career in this field, you must join a hedge fund with an investment strategy that suits you best.

Luckily, we’re here to assist. We’ll go over the most common hedge fund tactics today. To do so, let’s take a look at the hedge fund industry as a whole.

#01. Long/Short Equity

The long/short equity strategy is one of the most popular strategies for new hedge funds1. It entails having long and short positions in equities and equity derivative assets, as the name implies.

Long/short funds use a variety of fundamental and quantitative methodologies to make their investing decisions. In addition, they’re known for having simple investment fund terms.

As a result of the simplicity of liquidating positions when needed to assist investor withdrawals, lock-ups, gates, and other withdrawal terms are typically on the lenient side.

equity

#02. Market Neutral

Market neutral funds are similar to long-short equity funds in that they target returns that are unaffected by market performance. The goal of these funds is to reduce or eliminate market volatility.

Holding equal long and short bets in the same sector is one method. The key difference between market neutral and long/short portfolios is that market-neutral portfolios must have a portfolio beta of zero. Still, long/short portfolios can have a net long or net short bias based on the portfolio manager’s market perspective.

A convertible debt bond2 can be converted into stock at a later date. By hedging out the convertible debt’s equity call option, this approach isolates a convertible loan’s interest coupon.

market neutral funds

#03. Merger Arbitrage

Merger arbitrage3 is a riskier variant of market neutral, as it draws its profits on takeover activity. As a result, it’s frequently referred to as an event-driven strategy.

Following a stock trading transaction announcement, the hedge fund manager may purchase shares in the target business, and short sell the buying company’s shares at the merger agreement’s ratio.

merger arbitrage

#04. Convertible Arbitrage

Convertibles are a type of hybrid security that combines a fixed-income bond4 with an equity component. Typically, a convertible arbitrage hedge fund is long on convertible bonds and short on a portion of the shares they convert into.

As the market changes, managers aim to maintain a delta-neutral position, in which bond and stock positions offset each other. Volatility is the lifeblood of convertible arbitrage.

As the stock market fluctuates, more opportunities to change the delta-neutral hedge and book trading profits appear. When volatility is low, funds do well, but when volatility jumps, as it does in times of market stress, they struggle.

Convertible arbitrage is also subject to event risk.

convertible arbitrage

#05. Capital Structure Arbitrage

It’s a strategy in which a company’s inexpensive stock is purchased, and its overvalued stock is sold. Its goal is to profit from the capital structure of the issuing firm’s pricing inefficiencies.

Many directional, quantitative, and market-neutral credit hedge funds employ this method. It entails taking a long position in one security in a company’s capital structure while taking a short position in another security in the same capital structure.

capital fund

#06. Fixed-Income Arbitrage

Fixed-income arbitrage hedge funds extract gains from risk-free government bonds while avoiding credit risk. Investors who employ arbitrage to buy assets or securities on one market and then sell them on another market are arbitrageurs.

Any profit made by investors is due to a price difference between the buy and sale prices. As a result, managers make leveraged bets on how the yield curve will change form.

They will sell short long-dated bonds or bond futures and buy short-dated securities or interest rate futures, for example, if they predict long rates to rise relative to short rates.

fixed income 1

#07. Event-Driven

Event-driven strategies exist on the dividing line between equity and fixed income. During times of economic strength, when company activity is robust, this type of strategy works well.

Hedge funds use an event-driven strategy to buy debt from corporations in financial trouble or have already filed for bankruptcy. Investors in event-driven funds must be willing to take on some risk and wait for the right opportunity.

Corporate reorganizations don’t always go as planned, and in some situations, they might take months or even years to complete, causing the ailing company’s operations to suffer. Changing financial market conditions can have an impact on the outcome, for better or worse.

event driven

#08. Global Macro

Some hedge funds research how global macroeconomic5 trends will affect interest rates, currencies, commodities, and equities, taking long or short positions in the asset class that most closely reflects their views.

Despite the fact that global macro funds can trade nearly anything, managers typically pick highly liquid products like futures and currency forwards.

Managers of macro funds don’t always hedge, but they frequently make large directional bets, some of which never pay off. As a result, the returns of this hedge fund approach are among the most erratic of any.

global macro

#09. Short Only

Short-only hedge funds are professional pessimists who spend their energies finding inflated stocks are the ultimate directional traders.

They comb through financial statement footnotes and speak with suppliers and competitors in order to uncover any indicators of problems that investors may have overlooked.

Hedge fund managers hit a home run every now and again when they detect accounting fraud or other wrongdoing.

short only
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