Hedge Fund Strategies

Mutual funds and hedge funds differ significantly in their investment approaches.

While mutual funds primarily invest in equities and bonds that managers believe will increase in price, hedge fund managers employ a broad variety of tactics to leverage existing opportunities or to take advantage of new opportunities. Here are the main hedge fund investment strategies:

Directional/Tactical Hedge Fund Investment Strategy

• Macro-Centric – The hedge fund manager invests in securities which allow him to profit from changes in markets that are attributed to government and business influence and intervention. Broad-based investments include playing FX movements or investing in market indices. This is the high risk ‘top-down’ investment approach.

• Market Timing – With this strategy, hedge fund managers attempt to time the entry and exit points, and attempt to forecast the future market direction.

• Emerging markets – Hedge fund managers will invest with a special focus on emerging markets, as these markets generally offer high growth prospects. However, they are also volatile and subject to fluctuating inflation.

Event-driven Hedge Fund Strategy

• Distressed securities – With this fund strategy, hedge fund managers look out for companies in or facing bankruptcy. They then invest in these companies at steep discounts to estimated values; these discounts offer opportunities for profit. However, the major risk here is the risk of default.

• Reasonable value – With this fund strategy, hedge fund managers invest in securities selling at discounts to perceived value as a result of being relatively unknown or out of favor for particular reasons in the investment community. With this strategy, managers invest in equities with lower risks of default.

• Merger arbitrage – With this strategy, fund managers invest in unique opportunities for profit driven by corporate action. Examples include mergers and leveraged buyouts, corporate takeovers, legal reorganizations. Managers attempt to capture the market price spread between the companies involved in mergers or takeovers.

• One-time offs – This opportunistic investment strategy focuses on identifying specific events that offer short-term profit opportunities. These are one-time off, but offer the potential of high returns.

The hedge fund strategies here are the most important ones that hedge fund managers typically use. More on Hedge Fund Manager Compensation and Types of Hedge Funds.




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