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Hedge Fund Strategies

There are a number of ways that hedge fund managers differ from traditional money managers. One of the chief differences is that hedge fund managers can use non-traditional investment instruments and techniques. Although hedge fund managers employ a wide variety of different strategies or styles, they generally can be classified into six main categories.

Fund of Funds
Fund of Funds is an important style that allows investors, through a single investment, access to a variety of managers - often for a smaller investment than is typically required for participation in the individual funds. This blending of different hedge fund strategies and asset classes aims to provide a more stable long-term return than any of the individual funds. There are a range of funds of funds that vary in the number of underlying managers (often as many as 100), and the strategies they use. These include style-specific and diversified funds.

Equity/Long Short
Equity Long/Short involves long/short share based investing across a range of sectors, categories and regions. This currently is the largest sub-sector and tends to be more correlated to benchmark indices because of a net long market exposure bias.

Event Driven
Event Driven seeks to capitalize on specific event market mis-pricings, such as mergers, restructurings or bankruptcies. Sub-strategies include merger arbitrage and distressed securities investing.

Managed Futures
Managed Futures invests in futures and currencies on a global basis. The most common form involves the use of a systematic approach to trade a widely diversified range of markets and contracts based on identified trends.

Market Neutral/Arbitrage
Market Neutral/Arbitrage takes offsetting positions in closely related financial instruments to exploit disparities in pricing relationships. Sub-strategies include equities-balanced, fixed income arbitrage and convertible bond arbitrage.

Other Strategies
Other strategies include Global/Macro and those focused specifically on Emerging Markets. Global/Macro strategies seek to capitalize on country, regional and/or economic change affecting securities, commodities, and interest and currency rates. They often take large directional positions in national markets based on a top-down analysis of macroeconomic and financial conditions. Asset allocation can be aggressive; this style has been associated with a number of high profile individual managers.