Hedge Funds of Funds: A Guide for Investors

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Hedge Fund Strategies

2.1 OVERVIEW

In this chapter we will take a look at the variety of hedge fund strategies in existence. Below, I split the area into four main strategy groupings: Equity Long/Short, Event Driven/Distressed, Arbitrage and Relative Value and Macro and Trading. We will take a look at each strategy area, take a look at the kind of returns to be expected, the rationale for these returns, the risks involved and cover any other points germane to each strategy.

2.2 EQUITY LONG/SHORT

This strategy is also known as Equity Hedge and is fundamentally one of the closest strategies to traditional investing. Equity Long/Short funds managers generally seek out undervalued stock to buy and overvalued stock to short and so this strategy can be thought of as the hedge fund equivalent to a traditional equity fund. There are, however, some significant differences beyond the use of shorting.

Equity Long/Short funds tend to have a higher turnover than traditional funds as they seek to manage volatility and downside on a month-by-month basis whereas traditional funds tend to have a longer time horizon. As a result, it would be commonplace for a hedge fund to take advantage of short term misevaluations in the market over shorter periods of time such as a number of days. Furthermore, some Equity Long/Short funds will take advantage of shorter term market moves where they don't even believe a misevaluation has occurred – they would just run with the market. Equity Long/Short fund managers ...