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Hedge Fund Strategies
 
We always love to put things into boxes. Investors believe that they understand hedge funds better, when they know more about their "strategy". Many investors prefer hedge funds that fit into a single strategy. Investors rule, so hedge fund managers frequently categorize their funds in their disclosure documents and marketing literature.
 
Hedge funds may choose to pursue multiple strategies. Categories also overlap, so the choice of strategy
is a bit arbitrary.
 
To keep it short and simple: What is a hedge fund? What is a hedge fund strategy? There is no definition Many managers deviate from the announced strategy. Many hedge funds can’t fit into a single category. Many funds are "erroneously" classified because there aren’t enough categories to match all strategies.

 
Some Popular Hedge Fund Strategies
 
Global Macro
They take positions in stocks, bonds, and currencies worldwide, based on macroeconomic forecasts. George Soros employed a global macro strategy when he "attacked" sterling in 1992.
 
In discretionary macro, trading is done by investment managers instead of generated by software.
Software can be great. It can also be dangerous!
You may visit the www.anti-algorithmic-trading.com web page.
 
Market Neutral
The effort to avoid Market Risk by hedging.
It is sort of a dream - it is seldom possible in practice.
When it fails, you always read something like...  "unexpected correlations as market conditions change"
 
Equity Hedge Funds
Invest primarily in common stocks.

Equity Long Biased
The size of the long positions is larger than the size of the short positions
 
Long / Short Equity
Buying certain stocks long and selling others short.

Event Driven
Flexible and Opportunistic - as hedge funds should be.  Some managers prefer certain events, like bankruptcy and reorganization.

Fixed Income Hedge Funds
Invest in bonds and other fixed income instruments.
 
Arbitrage
Taking advantage of a price difference... or any other difference.
For example, you buy in Hong Kong and sell in New York simultaneously, taking advantage of the price difference.
 
Something more exotic?
 
Regulatory Arbitrage is the practice of taking advantage of a regulatory difference between two or more markets.

Two examples - can you see the opportunities?
A. Basel ii framework
B. The 8th Company Law Directive (the European Sarbanes-Oxley)
 
For more information you may visit www.regulatory-arbitrage.com

 
Funds of Funds
 
Hedge funds that invest in other hedge funds.
On the positive side, these funds are great for less sophisticated investors, or investors with smaller portfolios (the minimum investment is often smaller for a fund of funds than for a hedge fund). There is also risk reduction from diversification.
 
On the negative side investors pay fees to a fund of funds manager on top of the fees paid to the managers of the hedge funds.
 
 
 
 
 

 

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