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| Hedging Our Bets |
Hedge Fund Investment Styles
John Ferry
11/01/2004
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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.
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