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All of these hedge fund investment styles have the common objective to generate returns regardless of market direction.

Long/short equity is considered the most popular style, with an estimated 30% of all hedge funds worldwide using some form of long/short equity within their investment strategy.

Long/Short Equity

Long/Short Equity managers seek to profit from investing on both the long and short sides of equity markets. Managers have the ability to shift from value to growth, from small to medium to large capitalization stocks, and from net long to net short. Managers can change their exposures from net long to net short or market neutral at times. In addition to equities, long/short managers can trade equity futures and options as well as equity related securities and debt. Manager focus may be global, regional, or sector specific, such as technology, healthcare or financials. Managers tend to build portfolios that are more concentrated than traditional long-only equity funds.

Risk Arbitrage

Specialists invest simultaneously in long and short positions in both companies involved in a merger or acquisition. Risk arbitrageurs are typically long the stock of the company being acquired and short the stock of the acquiring company. The principal risk is deal risk, should the deal fail to close.

Risk (Merger) Arbitrage

Specialists invest simultaneously long and short in the companies involved in a merger or acquisition. Risk arbitrageurs are typically long the stock of the company being acquired and short the stock of the acquirer. By shorting the stock of the acquirer, the manager hedges out market risk, and isolates his exposure to the outcome of the announced deal. In cash deals, the manager needs only long the acquired company. The principal risk is deal risk, should the deal fail to close. Risk arbitrageurs also often invest in equity restructurings such as spin-offs or ‘stub trades’.

Convertible Arbitrage

Convertible Arbitrage managers seek to profit from investments in convertible securities employing both single security and portfolio hedging strategies. Managers typically build long positions of convertible and other equity hybrid securities and then hedge the equity component of the long securities positions by shorting the underlying stock or options of that company. Interest rate, volatility and credit hedges may also be employed. Hedge ratios need to be adjusted as markets move and positions are typically designed with the objective of creating profit opportunities irrespective of market moves.

Fixed Income Arbitrage

Fixed Income Arbitrage managers seek to profit from relationships between different fixed income securities; leveraging long and short positions in securities that are related either mathematically or economically. Many managers trade globally with a goal of generating steady returns with low volatility. The sector includes yield curve relative value trading involving interest rate swaps, government securities and futures; volatility trading involving options; and mortgage-backed securities arbitrage (the mortgage-backed market is primarily US-based, over-the-counter, and particularly complex).

Dedicated Short Bias

Dedicated Short Bias managers seek to profit from maintaining overall net short portfolios of long and short equities. Detailed individual company research typically forms the core alpha generation driver of short bias managers, and a focus on companies with weak cash flow generation is common. Risk management consists of offsetting long positions and stop-loss strategies. The fact that money losing short positions grow in size for a short bias manager makes risk management challenging.

Equity Market Neutral

Equity Market Neutral managers seek to profit from exploiting pricing relationships between different equities or related securities while typically hedging exposure to overall equity market moves. There are a number of sub-sectors including statistical arbitrage, quantitative long/short, fundamental long/short and index arbitrage. Managers often apply leverage to enhance returns.

Global Macro

Global Macro managers seek to profit from long and short positions in any of the world’s major capital markets (fixed income, currency, equity, commodity). Managers typically consider both economic adjustment themes as well as shorter-term technical conditions when choosing trading positions that anticipate market movements. Managers often employ a “top-down” global approach and may invest in multiple markets in anticipation of expected market movements. These movements may result from forecasted shifts in world economies, political changes or global supply and demand imbalances. Many Global Macro managers primarily trade in more liquid instruments in order to keep their trading activities flexible.

Event Driven

Event Driven managers seek to profit from the potential mispricing of corporate securities. There is a wide range of sub-sectors within the Event Driven sector with a common theme of corporate activity or creditworthiness. Sub-sectors include mergers and acquisitions; special situations equity trading, distressed investing and credit oriented trading. Many managers use a combination of strategies; adjusting exposures based upon the opportunity sets in each sub-sector.

Multi-Strategy

Multi-Strategy managers seek to profit from allocating to a number of different strategies and adjusting their allocations based upon perceived opportunities. Many Multi-Strategy managers began as convertible arbitrage managers that diversified into other strategies. Because each strategy is not in a separate fund, these managers often have the ability to run higher leverage levels than single strategy managers.

Event Driven Multi-Strategy

This subset refers to hedge funds that draw upon multiple themes, including risk arbitrage, distressed securities, and occasionally others such as investments in micro and small capitalization public companies that are raising money in private capital markets. Fund managers often shift assets between strategies in response to market opportunities.

Emerging Markets

Emerging Markets managers seek to profit from investments in currencies, debt instruments, equities and other instruments of “emerging” markets countries (typically measured by GDP per capita). Emerging Markets include countries in Latin America, Eastern Europe, Africa, and Asia. There are a number of sub-sectors, including arbitrage, credit and event driven, fixed income bias, and equity bias.

Distressed Debt

Fund managers invest in the debt, equity or trade claims of companies in financial distress and general bankruptcy. The securities of companies in need of legal action or restructuring to revive financial stability typically trade at substantial discounts to par value and thereby attract investments when managers perceive a turn-around will materialize. Managers may also take arbitrage positions within a company’s capital structure, typically by purchasing a senior debt tier and short-selling common stock, in the hopes of realizing returns from shifts in the spread between the two tiers.

Distressed/High Yield

Securities Fund managers in this non-traditional strategy invest in the debt, equity or trade claims of companies in financial distress or already in default. The securities of companies in distressed or defaulted situations typically trade at substantial discounts to par value due to difficulties in analyzing a proper value for such securities, lack of street coverage, or simply an inability on behalf of traditional investors to accurately value such claims or direct their legal interests during restructuring proceedings. Various strategies have been developed by which investors may take hedged or outright short positions in such claims, although this asset class is in general a long-only strategy.

Managed Futures

Managed Futures managers seek to profit from investments in listed bond, currency, equity and commodity futures markets globally. Also referred to as Commodity Trading Advisors (CTA), these managers tend to follow model based systematic trading programs that largely rely upon historical price data. The most common trading programs are long-term trend following ones that tend to invest with directional trends while using stop-loss points to control risk. Other common programs include short-term counter trend and hybrid systematic/discretionary programs.

Regulation D

(also Reg. D) This sub-set refers to investments in micro and small capitalization public companies that are raising money in private capital markets. Investments usually take the form of a convertible security with an exercise price that floats or is subject to a look-back provision that insulates the investor from a decline in the price of the underlying stock.


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