Alternative Investments: CAIA Level I, 3rd Edition

CHAPTER 20 Equity Hedge Funds

Equity hedge funds follow the most popular hedge fund strategy, whether measured in terms of assets under management (AUM) or in terms of the number of funds. As of the end of 2014, Hedge Fund Research estimated that equity hedge funds of all styles constituted 27.72% of hedge fund industry AUM and 37.32% of the number of hedge funds. Although this sector is the largest by AUM, equity hedge funds have a smaller average asset size than funds in the event-driven, macro, or relative value categories.

At their heart, equity hedge funds of all styles share a common strategy focused on taking long positions in undervalued stocks and short positions in overvalued stocks. A major difference among equity hedge fund strategies is the typical net market exposure maintained by managers. Positive systematic risk levels are typically maintained by equity long/short hedge funds. Equity long/short funds tend to have net positive systematic risk exposure from taking a net long position, with the long positions being larger than the short positions. Equity market-neutral funds attempt to balance short and long positions, ideally matching the beta exposure of the long and short positions and leaving the fund relatively insensitive to changes in the underlying stock market index. Finally, short-bias funds have larger short positions than long positions, leaving a persistent net short position relative to the market index that allows these funds to profit during times ...