Investment Strategies of Hedge Funds

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A Few Initial Remarks

1.1 WHAT IS A HEDGE FUND?

In the United States, the country where they first appeared and enjoyed the greatest development, there is no exact legal definition of the term “hedge fund” that outlines its operational footprint and gives a direct understanding of its meaning.

Yet, to rely on the literal meaning of hedge fund, i.e. “investment funds that employ hedging techniques”, could be misleading, because it relates merely to just one of the many traits of hedge funds and makes reference to only one of the many investment techniques they deploy.

A more fitting definition in our opinion is the following: “A hedge fund is an investment instrument that provides different risk/return profiles compared to traditional stock and bond investments”.

To appreciate the meaning fully, however, it is necessary to remark that hedge funds make use of investment strategies, or management styles, that are by definition alternative, and that they do not have to fulfill special regulatory limitations to pursue their mission: capital protection and generation of a positive return with low volatility and low market correlation.

Hedge funds are set up by managers who have decided to take the plunge into selfemployment, and whose backgrounds can be traced to the world of mutual funds or proprietary trading for investment banks.

The differences between hedge funds and mutual funds are manifold.

The performance of mutual funds is measured against a benchmark, and as such it ...