Hedge Fund strategies

Common characteristics

Legal/regulatory: usually to limited investors

Flexible mandates (few investment constraints)

Aggressive investment style

Larger universe (traditional and private assets)

Use of leverage

Liquidity constraints

high fee structure

Strategies

Equity

Event-Driven

Relative Value

Opportunistic
(range of market/region and asset classes)

  • Discretionary: mgmr skill
  • Systematic: rules based
  • Technical: statistical methods to predict
  • Fundamental: economic data

Specialist

Multi-mangers

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

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

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

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

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 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

One factor ➡ CAPM

Multi-factor (more factors to analyze HF)