CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2nd Edition

CHAPTER 16

Equity Hedge Funds

Equity hedge funds follow the most popular hedge fund strategy, whether measured in terms of assets under management (AUM) or the number of funds. As of the third quarter of 2010, Hedge Fund Research, Inc. (HFR) estimated that equity hedge funds of all styles comprised 30.15% of hedge fund industry AUM and 46.22% of the number of hedge funds. While 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/or 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 and 130/30 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. The 130/30 funds are a form of equity long/short fund with a specific long bias that targets 130% long exposure and 30% short exposure. 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 ...