Not many people were aware of hedge funds or the goodness of hedge funds, nor was I a year ago. That’s because hedge funds had always been considered as an alternative investment vehicle available only to sophisticated investors, such as institutes and individuals with significant assets. But over a past few years, with a changing phase of time, the preferences of investors are changing. Despite years of criticism and negative publicity, hedge funds have started appearing in the headlines slowly and gradually. Perhaps, that’s the reason which has influenced me to invest in hedge funds, especially, when I found a few of my friends earning a huge return on the hedge fund investment. I soon started seeking tips and advice from them to indulge in the funds and surprisingly found an immense potential in it to deliver a considerable return with the use of unique hedge fund investment strategies.
So to speak, hedge funds encompass a broad range of risk tolerance and investment philosophies within a wide array of investment vehicles, including equity and debt securities, commodities, currencies, derivatives, real estate and so much more. In the recent times also, the horizon of hedge fund strategies is undergoing an unprecedented expansion. Let us now browse through some of those strategies without any further delay.
Long/short equity: Long/short equity strategy is the most common strategy used in the hedge funds. As the name suggests, the long/short equity strategy involves adopting long and short positions in equity and equity derivative securities. The funds that use this strategy engage a wide range of fundamental and quantitative techniques while making investment decisions and tend to invest mostly in publicly traded equities and their derivatives. In addition, they employ the most uncomplicated terms and conditions that give immense freedom to the fund managers to purchase stocks that they feel are undervalued and sell stocks that they deem overvalued.
If the fund managers invest 70% of the funds long in stocks and 30% short in stocks, then the net exposure to the equity market remains 40% (70%-30%) and the leverage nil. On the other hand, if the fund manager increases long in stocks to 80% while keeping the short same, then the net exposure to the equity market becomes 110% (80%+30%) and the leverage 10%.
Credit: Credit is another important strategy for the hedge fund investment, primarily investing in fixed income securities, including sovereign, municipal, corporate, and/or distressed debt. This kind of strategy has played an immensely important role in the past and contributed a lot to financial and economic development. Usually, credit hedge fund managers trade with fixed income securities for a secured return, but some even deploy riskier strategy, such as arbitrage for a higher return.
Distressed investing: Distressed funds involve the strategy of investing in bank loans or high yield debt companies, which undergo either bankruptcy or restructuring. Funds purchase bank debts and bonds and trade claims, preferred stocks or common stocks if they are available at the right prices. In other words, the funds simply take an advantage of purchasing the stocks at a heavy discount since the company is in distress and the employees are well aware of it.
Global Macro: Global macro is one of the most diversified strategies of hedge funds. It invests in multiple investment tools like stocks, bonds, currencies, commodities, futures and other forms of derivatives after analyzing macroeconomic trends and their effects on the market. This fund primarily aims to make a profit from large economic and political changes in the countries and use techniques like systematic analysis and quantitative and fundamental approaches.
Multi-strategy fund: Multi-strategy fund is not limited to a single investment strategy or objective but uses a wide variety for generating a balanced hedge fund ROI regardless the market performance. The fund managers in this fund use a variety of processes to arrive at one investment decision, including both quantitative and fundamental techniques and employ multiple strategies like convertible bond arbitrage, long/short equity, statistical arbitrage and merger arbitrage.
Author’s Bio: Narnolia Securities Limited is a full-service brokerage house that always strives to provide unique to every financial and investment predicament. While the advance strategy and research are the key pillars of the firm, they do not shy away from offering hedge fund investment solution, systematic investment plan, portfolio management and much more.