Table 1 Description of hedge fund strategies
Strategy | Description |
|---|---|
convertibles | They take a long position in convertibles and short simultaneously the stock of companies having issued these convertibles in order to hedge a portion of the equity risk |
Distressed securities | The managers buy equity and debt at deep discounts issued by firms facing bankruptcy. They may be involved in a capital structure game, going long and short on different securities of the same issuer such as long on debt and short on equity. This investment style may also be pursued in the derivatives market with structured products like CDS and other credit derivatives |
Equity market neutral | The managers aim at obtaining returns with low or no correlation with equity and bond markets. They exploit the pricing inefficiencies between related equity securities |
Event-driven | The managers follow a multistrategy event-driven approach |
Fixed income | The managers follow a variety of fixed income strategies like exploiting relative mispricing between related sets of fixed income securities. They invest in MBS, CDO, CLO and other structured products. One of their main strategies is to go long on high yield or speculative bonds and short on bonds of higher credit ratings. The return spread between these two bond categories is a source of income for this strategy. However, this operation may provide substantial losses to the fixed income strategy when markets become illiquid or volatile |
Futures | The manager utilizes futures contracts to implement directional positions in global equity, interest rate, currency and commodity markets. He takes long and short positions in these markets so its portfolio beta tends to revert to 0. He resorts to leveraged positions to increase his return. Similarly to short-sellers, this strategy is part of the long volatility category |
Growth | The managers invest in companies experiencing strong growth in earnings per share |
Long-short credit | They take long and short positions in credit in spite of the unavailability of bonds. They invest in high-yield bonds, CDS and CDO, among others |
Macro | These funds have a particular interest in macroeconomic variables. They take positions according to their forecasts of these variables. Managers rely on quantitative models to implement their strategies |
Mergers | These funds may purchase the stock of a company being acquired and simultaneously sell the stock of his bidder. They hope to profit from the spread between the current price of the acquired company and its final price |
Multi-Strategy index | The manager utilizes investment strategies from more than one of the four broad strategy group indices |
Opportunistic | The managers’ investment approach changes over time to better take advantage of current market conditions and investment opportunities |
Short sellers | Managers take advantage of declining stocks. Short-selling consists in selling a borrowed stock in the hope of buying it at a lower price in the short-run. Managers’ positions may be highly leveraged. Like futures, this strategy is classified in the long volatility category |
Value index | Managers invest in securities which are perceived undervalued with respect to their “fundamentals”. This strategy tends to resort to leverage to increase returns |