Hedge funds are using a series of strategies to earn active returns for their investors, to invest the capital in a variety of assets rather than a large single investment. Most of these strategies can be called alternative investment styles.
Hedge funds take benefits from market’s odds and chances with the help of its strategies which are constructed in that manner. Hedge funds use different strategy as per investment style. Note “hedging” is mainly a getting practised to reduce risk but the primary goal of a hedge fund is maximise returns, due to its diversity of various strategies in use is possible to beat the general market. Unlike mutual funds, most hedge funds parts are largely uncontrolled because they serve to the investors which mostly are sophisticated.
Here are some strategies which exist in hedge funds as a general overview:
- Equity market neutral: This strategy looks to avail differences in prices of stocks by being short and long in stocks within industry, country, market etc.
- Convertible arbitrage: Synchronous purchase of convertible securities and add to common stock of the same issuer as a short sale.
- Fixed-income arbitrage: It involves seeks and utilization of inefficiencies in bonds pricing and generating clause contractually fixed of income.
- Distressed securities: Type of financial instruments used by a company near to bankruptcy and not able to meet its financial needs, it includes trade claims, preferred and equity shares, bank debts and bonds (corporate) with reduction in real value.
- Merger arbitrage: In this strategy two company merges and cumulatively buy and sell stocks to earn riskless profits.
- Hedged equity: Most common type of hedge fund nowadays, buying stocks which are undervalued and short selling stocks which are overvalued, it commonly employ leverage use as well as variable exposure.
- Global macro: It bases its holdings, like long and short position in fixed income, future markets currency and various equity.
- Emerging markets: Focused on less mature markets due not permitted short selling and fonds in force long.
- Fund of funds: FOF is a strategy which holds a portfolio of other funds in place of investing directly in those.
This is just a very brief overview of Hedge fund strategies, if interested I can show you are very profitable and secure strategy that I also use from time to time during company mergers.