A hedge fund is an investment vehicle that pools together money from a group of investors and uses a variety of investment strategies in an attempt to generate high return, which is very similar to what we have discussed under ‘what are financial funds’ article, however there are certain differences when compared to the traditional funds.

First of all, the hedge funds are typically open to a limited number of investors (in many jurisdictions only professional investors can invest in them), and are subject to less regulation than mutual funds. Additionally, they tend to employ more aggressive strategies to generate higher return or implement strategies that do not have a tendency to follow the general market. Following the strategies that are less correlated with the traditional markets allows the hedge funds to capture ‘alternative alpha’ that can lead to consistent returns even at the times of general markets downturn. The complexities of such strategies also carry additional costs to the investors with the traditional fees of 2/20 – 2% of management fees on assets under management and 20% performance fees on the returns exceeding the previous fund’s high watermark level.

Other aspect of them is that they imply longer redemption periods ranging between 30 and 90 days, which allows the hedge fund managers to realign their portfolios better following the withdrawal requests.

Hedge Fund Types

Equity	Event-driven	Relative Value	Opportunistic	Specialist	Multi-manager
– Long/short equity – Dedicated short bias – Equity market neutral	– Merger arbitrage – Distressed securities	– Fixed income arbitrage – Convertible bond arbitrage	– Global macro – Managed futures	– Volatility strategies – Reinsurance strategies	– Multi-strategy – Fund-of-funds

Some of the most popular strategies are described below:

• Long/short investing: This involves taking long positions in assets that are expected to increase in value, and short positions in assets that are expected to decrease in value.
• Arbitrage: This involves taking advantage of price discrepancies in the same or similar assets across different markets or exchanges.
• Activist investing: This involves taking large stakes in companies and then working to influence the direction of the company, often through shareholder activism.
• Time-series momentum – A managed futures trend following strategy in which managers go long assets that are rising in price and go short assets that are falling in price. The manager trades on an absolute basis, so be net long or net short depending on the current price trend of an asset. This approach works best when an asset’s own past returns are a good predictor of its future returns.
• Cross-sectional momentum – A managed futures trend following strategy implemented with a cross-section of assets (within an asset class) by going long those that are rising in price the most and by shorting those that are falling the most. This approach generally results in holding a net zero (market-neutral) position and works well when a market’s out- or underperformance is a reliable predictor of its future performance.
• Relative value volatility arbitrage – A volatility trading strategy that aims to source and buy cheap volatility and sell more expensive volatility while netting out the time decay aspects normally associated with options portfolios.

Please note, none of the information on this blog represents the opinion of my employer and all information does not represent a financial advice.