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Hedge Fund strategies (Common characteristics (Legal/regulatory: usually…
Hedge Fund strategies
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Strategies
Equity
Long/Short
- Diverse styles, short and long positions
- Liquid, diverse, typically reduces beta risk and adds alpha and reduced volatility
- Variable leverage
Dedicated Short bias
- Only short exposure, focus on stock picking, alpha via market timing
- Liquid, negative correlated alpha. Lower returns but more volatile
- Low leverage
Equity market neutral
- long/short in similar/related equities to have zero beta to certain risk factors. Therefore apply leverage to positions to expected returns stocks
- advantage in idiosyncratic mispricing (alpha but no beta risk), attractive during vol and weakness. Steadier returns
- High leverage
Event-Driven
Merger arbitrage
- Liquid strategy, gains from takeover situations
- High sharpe ratios (double digit returns, single digit s.d) but left tail risk
- Moderate leverage
Distressed securities
- Take advantage of bankruptcy/fin distress events, but longer timeframe and illiquidity
- cyclical returns and high volatility
- moderate to low leverage
Relative Value
Fixed income arb
- returns derives from high correlations across securities and yield spread
- increase diversity of debt securities and function of correlations between assets
- High leverage
Convertible bond arb
- Benefits from cheap source of implied volatility compared to underlying (cheap calls)
- reasonable liquid, works well in moderate volatility
- High leverage
Opportunistic
(range of market/region and asset classes)
- Discretionary: mgmr skill
- Systematic: rules based
- Technical: statistical methods to predict
- Fundamental: economic data
Global marco
- wide range of assets classes, focus on themes/regions, top-down
- heterogenous (depends on mgrs)
- uses leverage
Managed futures
- actively manages derivatives to gain asset exposure, systematic with quant driven to identify trends
- Time series momentum (stock) or cross sectional momentum (group)
- positive skewed
- high use of leverage
Specialist
Volatility strategies
- buy cheap vol and sell expensive vol using derivatives (VIX futures, options, swaps)
- source of return across different geographic and asset classes
Reinsurance strategies
- secondary insurance market where policyholders can sell their polices to HFs (who have different view on events)
- uncorrelated return alpha
Multi-mangers
Multi strategy
- combines multi HF under same HF structure and easier to change strategies
- fees is less than FoF
- Higher leverage
Fund of Funds
- FoF manageres aggregate capital and allocate to diff HFs (less correlated)
- provides diversification, less extreme risk exposure, lower realized volatility but double layer of fees
- Moderate leverage
Conditional factor risk model
- analyzing HF strategy risk exposures
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