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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.
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 / Basel iii frameworks
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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