Jan

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Hedge Fund Strategies/Styles

January 30, 2008 | Leave a Comment

Convertible Arbitrage: An investment strategy that is long convertible securities (usually preferred shares or bonds) that are exchangeable for a set number of another form (usually common shares) at a prestated price, and short the underlying equities. 

Distressed Securities: Fund invests in securities (equity and/or debt) of a company either already in bankruptcy or facing it. These securities are purchased by the investor inexpensively. It is hoped that as the company emerges from bankruptcy the securities will appreciate. 

Emerging Markets: Fund invests in securities of companies in developing, or, emerging countries. The strategy consists of purchasing sovereign or corporate debt and/or equity in such countries.    

Growth Fund: Fund invests in growth stocks. This strategy seeks capital appreciation as it’s goal. Many of these portfolios are hedged by short selling and options.    

Macro or Global: This strategy invests in shifts in global economies. Derivatives are often used to speculate on interest rate moves and currency moves. These hedge funds exploit opportunistic investment possibilities wherever they may be found.    

Market Neutral: Typically a long/short strategy — where equal amounts of capital are invested long and short the market. It attempts to “neutralize” market risk by purchasing under valued securities and shorting the over valued ones.    

Market Timing: Anticipates the timing of when to be in and out of markets. The allocation of assets among investments primarily switching between stocks, bonds and cash depending on market and/or economic outlook.    

Opportunistic: The manager switches between strategies as the manager deems necessary. It is not unusual for a manager to employ several strategies simultaneously.    

Sector Funds: Manager invests in different sectors of the economy such as technology, finance, etc. A sector fund manager will invest long and short securities. They will also use options.    

Short Selling: The manager finds companies that have over valued securities and “shorts” or sells the stocks of those companies. In anticipation of the stocks of these companies going down, the manager borrows the stocks to sell them hoping to buy them back later at a lower price. In this way the manager replaces the shares that he borrowed in order to sell. These portfolios often see rapid portfolio turnover in addition to the use of leverage.    

Special Situations: Manager takes a position in an undervalued security that is anticipated to rise in value because of an expected favorable turn of events. Such strategies are known as “event driven.” Some special situations include an announcement of a merger, reorganization, or a takeover to name but a few. There are hedge fund managers that specialize in these different special situations.     Merger/Risk Arbitrage, mentioned above is one such “event driven” strategy. In this case, the manager invests in announced corporate takeovers/mergers.


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