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Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance by Kevin R. Mirabile

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Investment Process and Portfolio Characteristics

Long and short equity managers follow an investment process that is specific to their fund strategy and investment objectives. Long bias funds, variable bias funds, equity market neutral funds, risk arbitrage funds, and event-driven funds all employ a different process in part as a result of the strategy itself and in part due to the idiosyncratic process of each manager.

The investment process and objectives of long bias and variable hedge funds are similar to traditional equity managers in many ways, and as such the funds are evaluated similarly to traditional managers. Performance and risk are typically measured against a market index. Despite some major similarities, there are also some significant differences between long biased hedge funds and traditional managers. Long bias funds employ a different organization and legal structure; have a different compensation model; can use some leverage, short selling, and options; and normally have lower volatility targets than traditional managers.

A classic equity market neutral fund has a process that is more quantitative and perhaps less opportunistic and more constrained than a classic variable bias fund. A quantitative equity market neutral process is the most constrained and least opportunistic strategy employed by long and short equity managers.

Risk arbitrage and other equity event–driven strategies, such as activist funds, are the most opportunistic among long and short equity ...

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