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
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 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 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 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 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 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.