Investment

Investing 101: Strategies Used in Hedge Funds

Hedge funds are powerful financial vehicles that let investors in for various treats. If you plan to invest in such financial vehicle, you will surely enjoy the benefits you’re about to get.

Some of these benefits include the Finance Brokerage Education availability of a professional investment advisor, diversification, and exposure to various aggressive strategies. Of course, the greatest benefit you can have, if your fund performs well, is getting higher returns.

Meanwhile, many investors run after hedge funds because of the various investing Forex Trading strategies they can get exposed to. And here are some of those investment strategies. Read on!

Long-Short Equity

The long-short equity strategy is one of the most commonly used investment strategies in many hedged funds.

With this strategy, the fund will take long and short positions in the equity market and equity derivative securities.

The funds that use the long-short equity strategy typically use a wide range of fundamental and quantitative techniques to come up with investment decisions.

Credit Funds

Hedges funds that use the credit fund strategy are those that make investments based in the lending inefficiencies. Credit funds usually follow cyclical patterns, and they are also most active during after economic downturns and restrictions on the credit market.

Among credit funds are distressed debt strategies that involve investment in corporate bonds, fixed-income bonds that invest in long-term government, bank, and corporate bond, and direct lending.

Arbitrage

Arbitrage strategies are those that try to play on visible price differences between closely-related investments by simultaneously buying and selling investments. If you can properly use them, arbitrage strategies give consistent return with very minimal risks.

On the other hand, due to price inefficiencies being usually diminutive, arbitrage funds must rely largely on leverage to gain sizeable returns.

Event-driven strategy

Event-driven strategies closely relate to arbitrage strategies. It aims to make use of pricing inflation or deflation that takes place as a result of certain corporate events, which include mergers and acquisitions, reorganizations, restructuring, asset selloff, spinoffs, liquidations , bankruptcy, and other events that can cause inefficient stock pricing.

Event-driven strategies need knowledge in the fundamental modelling and analysis of corporate events. Some examples of event-driven strategies are merger arbitrage, risk arbitrage, distressed debt, and event-based capital structure arbitrage.

Black Box, or Quantitative strategy

Quantitative hedge fund strategies depend on quantitative analysis in order to make investment decisions. These hedge fund strategies normally use technology-based algorithmic modelling to get the desired investment objectives.

Quantitative strategies are typically referred to as “black box” funds because investors have limited access to investment strategy specifics.

Global Macro

Global macro has more to do with the broad political and economics outlooks of countries. It includes both directional analysis and relative analysis.

Directional analysis tries to predict the rise or decline of a country’s economy. On the other hand, relative analysis evaluates the economic trend relative to each other.

Global macro funds are not limited to any certain investment vehicle or asset class. In addition, it has investments in equity, debt, commodities, futures, currencies, real estate, and other assets in various countries.