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Managing Hedge Fund Risk and Financing: Adapting to a New Era by DAVID P. BELMONT, CFA

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Hedge fund Strategies

Classifying hedge fund strategies and understanding the risks of each is a useful conceptual exercise and a means of organizing a wide array of information into a coherent mental framework. However, the reality is that few hedge funds perfectly follow a pure single strategy. Any investor who has reviewed a hedge fund's prospectus will have noted the significant latitude fund managers reserve for themselves when they describe their investment and portfolio construction guidelines. The reality today is that the typical hedge fund, if it is not a self-professed “multi strategy” fund, is at least a hybrid of several archetypal strategies. In the end, fitting a hedge fund into a specific and well-defined strategy is like trying to fit a unicorn into a scientific genus and species. Consequently, any real-world classification of fund strategies is subjective and imperfect. This chapter provides a classification and description of the risk of distinct archetypal hedge fund strategies.

Table 3.1 divides the hedge fund universe into event driven, relative-value, and opportunistic strategies. The directionality1 (that is, sensitivity to market increases or decreases) of each strategy group decreases from left to right.

Table 3.1 Hedge fund strategies.

Opportunistic Event Driven Relative Value
Macro Risk Arbitrage Convertible Bond Arbitrage
Long/Short Distressed Securities Equity Market-neutral
Emerging Markets Activist Strategies Statistical Arbitrage

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