Your guide to a career in financeTM

Four main hedge fund strategies

1. Equity hedge funds

Funds are actively managed by equity managers who can use leverage and sell short. Goal: to provide an absolute return regardless of market performance.
Three main categories:

  • Long biased – net long at least 50% of the time
  • Short biased – net short at least 50% of the time
  • Opportunistic – neither long nor short biased

2. Global asset allocators (sometimes called macro investors)

These managers are focused on broad markets and themes (eg. Global stock & bond markets, currency markets, commodity markets). If mgr thinks that the Canadian market is better than the United States market, he will be long a Canadian equity market index and short a US equity market index.

  • Discretionary managers- based on fundamental analysis (growth, inflation, trade flows)
  • Systematic managers- based on technical data (price, volume, etc)

3. Relative-value managers (aka. Market neutral funds)

  • Fund is balanced so that hedged portfolio is unaffected by the general movement up or down of stocks. An example is an equity manager that specializes in retail stocks:
  • Long positions in undervalued retail stocks
  • Short positions in retail stocks
  • Makes sure that the dollar value of long & short positions is the same so that neither long/short

Four subcategories:

  • Long-short equity managers- buy stocks in attractive companies & sell short stocks in unattractive companies
  • Bond hedger- buys attractive bonds & sells short unattractive bonds. Attractive bonds usually carry higher yield than unattractive bonds
  • Convertible hedger- buys the convertible security (bonds or preferred stock) then sells short the underlying stock
  • Multi-strategy managers- use combination of the above

4. Event-driven managers

Company-specific strategies that focus on transactions that affect the organization:

  • Risk arbitrage (aka merger/deal arbitrage) – takes advantage of special opportunities that arise when companies decide to buy, or merge with, other companies
  • Distressed debt investing – takes advantage of opportunities that arise when companies in financial distress undergo financial restructuring- bets that debt he buys will be worth more at the end of the reorganization process
  • Multi-strategy- mix of both