Fri. Jun 2nd, 2023

types of hedge fund strategies

Types of Hedge Fund Strategies

There are various hedge fund strategies, including long/short equity, event-driven arbitrage funds, macro strategy funds and multi-strategy funds.

Hedge funds use various hedging strategies and leverage techniques in order to lower portfolio volatility and enhance returns, with losses amplified or profits magnified according to individual circumstances.

Long/Short Equity

Long/Short Equity strategies are an increasingly popular way for hedge funds to maximize returns while mitigating risk. This involves taking long positions in equity which are expected to gain value while simultaneously selling securities that appear overvalued and thus likely to decrease in price.

This is a popular investing strategy that mimics the practices employed by options and futures traders, but differs in that its fund doesn’t rely on forecasting market direction to maximize profits; rather it takes advantage of market timing to maximize earnings.

Benefits of this strategy include providing greater diversification than other investments, which is particularly useful during times of market instability. Unfortunately, however, it may not be suitable for all investors due to potential capital losses.

Long/Short Equity is an attractive strategy for hedge fund managers looking for ways to generate alpha (incremental return over an index benchmark). It utilizes market neutral strategies by being long and short in related stocks.

Long/Short Equity strategies come in many shapes and forms, each tailored to different investment styles and goals. Some focus on specific industries or markets while others take an all-around approach. To ensure its success, a Long/Short Equity strategy must find an optimal mix of gross/net exposures, number of positions per portfolio, holding periods etc.

Most Long/Short Equity hedge funds employ a 130/30 strategy, meaning that they invest 130% of their capital in long positions and 30% in short ones. Although this ratio has proven itself effective, its limited profit potential makes it controversial choice.

Long-short strategies have proven themselves successful among a range of investors, such as pension and endowment funds and retail investors seeking ways to limit risk while still producing positive returns.

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Long-short equity strategies remain a popular choice, yet have had mixed performance records over the years. This may be attributed to market fluctuations that have increased, diminishing short positions’ performance.

Another challenge stemming from increased share borrowing costs has been making short positions more challenging and there being less short-biased long-short funds compared to other equity strategies.

Long/short equity strategies have lost much of their appeal in recent years as hedge funds increasingly adopt discretionary hedging strategies as discretionary equity strategies, rendering long/short strategies irrelevant and irrelevant for many funds.

Long/Short Equity can be an excellent investment strategy, yet its implementation can be complex and require extensive research and analysis. Furthermore, this method requires time-intensive effort that may ultimately prove costly in both time and costs.


Event-driven hedge fund strategies aim to take advantage of temporary mispricings caused by corporate events like mergers, acquisitions, restructurings, bankruptcy or spinoffs. This strategy differs from long-short equity strategies in that returns are generated by selling securities prior to an event and then purchasing them back at reduced prices later.

Event-driven funds come in many shapes and forms; each designed to address specific corporate events. To be successful with them, it’s key to know what events may occur in the near future and do your research beforehand to identify these events as they arise.

These strategies utilize complex models and data sources from news reports, corporate earnings calls, regulatory changes and more – helping managers to identify opportunities with an excellent risk-adjusted return on investment.

Event-driven strategies often include merger arbitrage, convertible arbitrage and distressed investing as the most prominent event-driven strategies. Other forms may involve investing in specific company debt such as corporate bonds or bank debt.

The main advantage of this strategy lies in its low correlation to the wider stock market; instead it seeks to take advantage of pricing inefficiencies in an attempt to capture potential profits even during weak economic environments and diversify a portfolio of equities.

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Another advantage of this strategy is its accessibility: it can be implemented with relatively modest capital outlays. Furthermore, this strategy serves as a great complement to traditional long/short equity strategies, enabling an investor to take advantage of mispricings while remaining underweighted toward equity assets overall.

Strategy-led approaches typically reflect a manager’s expectation that a specific situation may occur in the near future, such as mergers and acquisitions, business consolidations, recapitalizations or any changes to corporate governance that have an immediate positive effect on value of companies.

Events which could impact the discount or premium of holding company stocks include earnings releases, dividend announcements and any significant news which could drive prices higher.

Event-driven strategies have grown increasingly popular during recessionary years. While their performance may not match that of long-short equity strategies, event-driven ones remain important components of an investor portfolio and often paired with others such as risk arbitrage for greater diversification across economic cycles.


Arbitrage is an investment strategy which takes advantage of price differences among various markets to generate profits by buying and selling securities to make use of arbitrage opportunities. Though it often takes the form of buying and selling securities to generate profit, arbitrage can also be employed in other ways to generate gains.

Arbitrages can be an excellent way to make additional income, but require experienced investors and can be risky investments. That is why professional traders typically turn to arbitrages as a quick way of making extra cash.

Arbitrage can be an excellent way for individual investors to capitalize on market fluctuations while mitigating risks by decreasing volatility in their portfolios.

There are various arbitrage strategies, so it’s essential to be knowledgeable of them and their applications. Below are a few pointers to help you assess whether arbitrage may fit with your financial goals:

Pure arbitrage: This strategy leverages price differences between markets to make a profit. For instance, if gold trading at a higher price in New York than Tokyo can create an arbitrageur’s opportunity to buy and sell simultaneously for maximum returns.

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Statistical Arbitrage: This strategy employs algorithms to identify price discrepancies between related assets. As opposed to pure arbitrage strategies which can take time and energy to implement, statistical arbitrage provides fast and efficient solutions.

This strategy’s primary benefit lies in eliminating market inefficiencies. This strategy may prove particularly useful in volatile markets where stocks and commodities fluctuate more drastically than anticipated.

Arbitrage investing may also be suitable for investors who seek high returns with minimal risks, although arbitrage investing should be seen as highly leveraged form of investing and could potentially lead to losses should one trade go wrong.

Individual investors often struggle to profit from arbitrage due to its complexity and require large sums of capital and sophisticated software. Therefore, this form of investing tends to be less popular among individual investors and more often used by professional traders and hedge funds.

Arbitrage can be hard to predict, so it is wise to utilize it only as part of your overall portfolio strategy. Arbitrage offers an effective way of mitigating risks while increasing returns; however, finding funds with consistent returns may prove more challenging than expected.

Jeffrey Augers
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By Jeffrey Augers

Jeffrey Augers is a highly skilled and experienced financial analyst with over 12 years of experience in the finance industry. He has a proven track record of delivering exceptional financial insights and recommendations to clients, empowering them to make informed decisions and achieve their financial goals. Jeffrey holds a Bachelor's degree in Finance from the University of Michigan, and an MBA from the Wharton School of Business.