Types of Hedge Funds

Hedge funds come in many flavors, including:

  • Equity market neutral funds, which offset long positions in stocks with equal short positions in order to eliminate systematic market exposure (beta).
  • Convertible arbitrage funds attempt to exploit anomalies between the price of a stock and the prices of instruments convertible into the stock.
  • Fixed income arbitrage tries to predict changes in credit ratings or the term structure of interest rates. Typically these funds strive for market-neutral positions by offsetting long and short positions.
  • Distressed securities funds exploit the fact that many investors lack the desire to participate in the bankruptcy process or the ability to identify their value.
  • Merger arbitrage captures any spread between the price of a company and the price that a planned acquiror has offered.
  • Hedged equity funds hold both long and short positions but typically remain net long.
  • Global macro funds exploit systematic market moves in currencies, futures and option contracts.
  • Emerging markets funds focus on less mature investment markets.
  • Funds of funds invest in a number of other hedge funds, offering diversification at the cost of double fees.

Hedge fund styles, more generally, include:

  • Relative value, which seeks to exploit valuation discrepancies between their long and short positions
  • Event-driven, which focus on opportunities created by corporate actions such as mergers or offerings
  • Equity hedge, which invest long and short for varying degrees of market exposure and leverage
  • Global asset allocation, which opportunistically go long or short a variety of assets
  • Short selling, which shorts equities in anticipation of a market decline
For more information, see all articles on: Active Management, Alternative Assets, Asset Allocation, Hedge Funds, Portfolio Management

See also:
  • Risk Transparency versus Position Transparency
  • Determinants of Funds of Hedge Funds Performance
  • Are Hedge Fund Strategies Just About Leverage?
  • Do Market Timing Hedge Funds Time the Market?
  • The Structure of Hedge Funds
  • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

    Leave a Reply

    You must be logged in to post a comment.