HEDGE FUND CATEGORIES
Hedge Funds tend to be classified according to the markets they invest in or the strategies they employ. There is no official classification and the groupings tend to emerge once a large enough number of similar hedge funds are established.
LONG-ONLY LEVERAGED
A traditional equity fund structured like a hedge fund in that it will use leverage to maximize trading ability and will charge a performance fee for the manager.
SHORT-SELLERS
Thinking that the overvalued stocks will fall, a hedge fund borrows stock and sells it, hoping to buy it back at a lower price. Can be used to hedge long-only portfolios
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EVENT-DRIVEN
Investment strategy follows events that are seen as special situations or opportunities to capitalize from price fluctuations
Risk Arbitrage Manager simultaneously buys stock in a target company and sells stock in its acquirers. The trade depends on the takeover being completed. Reverse positions on takeover failure are also sometimes taken.
Distressed Securities Securities of companies in reorganization and/or bankruptcy, ranging from senior secured debt (low-risk) to common stock (high risk)
GLOBAL
International Focuses on ex-USA global economic change. More stock-pickers in favoured markets so bottom-up-oriented and tend not to use index derivatives as much as macro funds.
Regional – Established Focuses on opportunities in established markets such as USA, Europe and Japan.
Regional- Emerging Less mature financial markets. The difficulty here is the inability to short sell in most emerging markets which forces managers to go to cash or change markets as long positions turn unprofitable.
GLOBAL MACRO
Opportunistic, using leverage and derivatives to increase and enhance positions – the classic Soros type strategy with variable timelines from less than a month to over a year, profiting wherever an opening is spotted to create value.
SECTOR
Investment in particular economic sectors and/or industries. Focus can vary between large to micro cap and the approach can be fundamental, technical, opportunistic or bottom-down.
MARKET NEUTRAL
The theory is to neutralise market risk at any one time, the reality is more a large reduction in market risk. This is done by building positions of opposite and equal size or utilizing derivatives to offset downside risk.
Long/short Net exposure to market risk is reduced by having equal allocations on the long and short sides of the market
Stock arbitrage Purchase basket of stocks and sell short stock index futures contract, or the reverse
Fixed income arbitrage Purchase bonds and short instruments that replicate the bonds. Strategy aims to profit from mispricing between the two sides.
Convertible arbitrage Purchase convertible securities and short the underlying equities in order to profit from mispricing between the two.
FUND OF FUNDS
Pooled capital is invested in a variety of funds diversifying risk across investment styles and return targets. Offers investors the ability to be part of funds with higher minimum investment amounts than they have.
