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