Hedge Fund Investment Strategies

All hedge funds are not the same. Although they appear to be so in structure, each hedge fund is unique when the investment it pursues is considered. In almost all cases, each hedge fund manager is a specialist pursuing a very specific investment approach called the investment style or strategy. Hedge funds can be grouped according to the general strategy pursued, but within such groupings multiple substrategies exist.

An investment strategy is an approach to selecting securities, or a portfolio of securities, based on an investment philosophy designed to derive returns by taking unique risks in the financial markets. For example, all merger arbitrageurs derive returns by taking long and short positions in companies engaged in a merger,

thereby taking the “event risk” associated with the deal not going through. Hedge Fund Research, Inc. (HFR)1 groups these hedge fund investment strategies into thirteen categories. Strategy groupings are determined by the core opportunity being accessed, the source of return, the risks taken, and the instruments used. Each category is further divided into subcategories. This more granular categorization allows for variations on core strategy themes. Only by examining funds and their managers at this substrategy level of detail is it possible to develop a meaningful understanding of the return potential and the associated risk.

What follows are brief summaries of the major hedge fund strategy categories. These descriptions are meant to be only a summary guide to the types of investment approaches being followed by the underlying hedge fund managers to which fund of funds (FOF) managers may allocate capital.

These summary statistics are based on performance indices calculated by HFR. The methodology used is to equally weight all funds in any given strategy that are currently reporting to the HFR database. Although the resultant index gives a good indication of what the strategy as a whole is offering at any given time, it may mask a wide dispersion of returns within the group. This is certainly the case in some of the more broadly defined categories such as Equity Hedge, Event Driven, and Macro (also known as Global Macro). The dispersion will be less in a more narrowly defined strategy such as Merger Arbitrage. The greater the dispersion, the more important the role of the fund of funds manager in selecting managers.

Here are List of Hedge Fund Investment Strategies:
  • Convertible Arbitrage
  • Distressed Securities 
  • Emerging Markets 
  • Equity Hedge 
  • Equity Market Neutral
  • Event Driven 
  • Fixed Income
  • Macro
  • Market Timing
  • Merger Arbitrage
  • Relative Value Arbitrage
  • Sector Long/Short
  • Short Selling/Short Bias
Hedge fund investment approaches can be categorized into a variety of distinct strategies. For each strategy, there are multiple variations called substrategies. Most hedge fund managers are specialists pursuing a specific strategy and substrategy, although some use two or more strategies and multiple substrategies. In constructing their portfolio, fund of funds managers will select hedge funds based on strategies and substrategies they follow. The selection of a hedge fund is, in effect, a substrategy selection. Which strategies are selected and how they are weighted in a portfolio will depend on the performance goals of a fund of funds and the risk and return outlook that the fund of funds manager has for the strategies.

To find out how the Hedge Fund Investment Strategies List work out, you can buy this investment book to complete your knowledge.

This review is from: Hedge Fund of Funds Investing: An Investor's Guide (Hardcover) in amazon
Investors should read this book if they are looking to invest in a fund of funds. The author has done a great job explaining the strategies and techniques used to manage the fund, and great thorough analysis on how to analyze its performance. The book also includes a lot of useful information about the background of this type of inverstment product and how to evaluate risk, fees, performance, etc.