John Ferry
11/01/2004
Hedge fund managers use a variety of techniques to extract returns from market inefficiencies. Their strategies are often referred to as investment styles. The 10 most popular and well-established hedge fund investment styles, according to CSFB/Tremont, are listed below.
Investment Style: Equity Long/Short
Description: Managers go long equities they believe will rise in price while going short stocks that they believe will fall.
Objective: Benefit from manager’s expertise; avoid market neutral positions.
Risk factor: As with global macro funds, equity long/short managers are known for taking relatively large risks.
Investment Style: Global Macro
Description: Managers take positions in a variety of global markets based on trends or specific geopolitical events.
Objective: Positive exposure to emerging global markets.
Risk factor: Exposures to currency and equity market risks.
Investment Style: Fixed Income Arbitrage
Description: Fund managers maintain a neutral exposure by buying risky illiquid and shorting less-risky illiquid securities.
Objective: Profit from price discrepancies and movements between related short-term bonds.
Risk factor: Exposures to fixed income market risks.
Investment Style: Event-Driven
Description: Managers exploit specific corporate event opportunities such as a reorganization, restructuring, share buyback or liquidation.
Objective: Capture price movement in a company’s value that is related to an event.
Risk factor: Failure of corporate event to inspire anticipated price movement.
Investment Style: Multistrategy
Description: As the name suggests, these funds utilize a variety of styles, dynamically allocating money between them depending on market opportunities.
Objective: Profit from opportunities that require more flexible investment strategies.
Risk factor: Exposure to underlying markets.
Investment Style: Managed Futures
Description: Managers invest globally in financial and commodity futures markets and currency markets.
Objective: Profit from inefficiencies in the futures markets.
Risk factor: Exposure to futures markets risks.
Investment Style: Convertible Arbitrage
Description: Managers invest in
convertible bonds to obtain embedded stock options, while selling short the
underlying stocks.
Objective: Profit from equity market volatility.
Risk
factor: Inaccurate valuation of options.
Investment Style: Equity Market Neutral
Description: These funds use the
same strategy as long/short managers, but they balance their capital investment
in long and short positions to make their portfolios market
neutral.
Objective: Minimize risks inherent in equities markets.
Risk factor: Bear markets make market neutrality difficult to achieve.
Investment Style: Emerging Markets
Description: Managers typically employ
a long-only strategy with equity and fixed-income investing in global markets.
Objective: Profit from emerging global markets.
Risk factor: Exposure to
volatility of global markets.
Investment Style: Dedicated Short Bias
Description: Managers take short
positions in equities and derivatives.
Objective: Profit from falling stock
values.
Risk factor: Short positions lose value in a bull market.
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