Tue. May 30th, 2023

hedge fund strategies directional

Hedge Fund Strategies

Hedge fund strategies are investment pools that employ various financial instruments and risk management techniques to generate returns, differing from traditional mutual funds or ETFs in their strategies, risks, volatility and expected return profile.

Hedge funds can be broken down into various strategy groups based on their approach, instrument use and market sector. This reading explores some of the distinct regulatory and investment characteristics associated with each strategy group, as well as ways of classifying them based on risk profiles.

Long/Short Equity

The equity long/short strategy is one of the most prevalent hedge fund strategies and accounts for most global hedge fund strategies. It has proven immensely popular with investors because it can offer significant returns while mitigating downside risk – yet, it must be used cautiously and may not suit everyone.

Before choosing an investment strategy, it’s essential to have an in-depth knowledge of long-short equity strategies and determine whether this hedge fund strategy suits you. This will allow you to make an informed decision.

Before investing in long-short equity, investors must carefully consider multiple factors, including market conditions, performance metrics and individual risk tolerance. It is also crucial to build a portfolio based on these considerations that is then adjusted according to changing market conditions.

There are various long-short equity hedge funds, each with its own investment style and strategy. Some focus on specific sectors or industries while others use market neutral strategies or implement measures designed to mitigate market volatility.

These strategies include directional, quantitative oriented and relative value funds; with latter typically being more complex. Short selling is only one strategy available here.

These strategies typically combine long and short positions in stocks trading at different price levels to maximize profit potential by buying low and selling high. Leverage or derivatives may also be implemented as risk management mechanisms to further minimize returns.

Based on their particular strategies, mutual funds may vary in terms of gross and net exposure, number of positions per portfolio, holding period and other variables. Some may trade large volumes while others might only hold small amounts or few positions each year.

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Market-neutral or zero-net equity hedge fund strategies are among the most prevalent long-short equity hedging fund strategies, designed to minimize outside market movements by trading related stocks on both long and short positions simultaneously, with their dollar amounts remaining equal.

These strategies may involve long-only and short-only approaches to identify mispriced securities. Although difficult to manage, such strategies could result in significant losses if their stocks are misvalued.

Short Bias

Short Bias strategies employ analytical techniques in which their investment thesis relies on evaluating valuation characteristics of companies to identify overvalued ones, unlike traditional equity managers who typically have market generalist thesis that applies to any company with similar business models and capitalization structures.

But this strategy does come with its share of drawbacks. A steep market downturn, like that seen during 2007-2008 bear market, can negatively affect hedge fund performance. Furthermore, their high correlation to the market can cause them to remain stuck in long positions without seeking out other more lucrative opportunities.

As part of their effort to avoid these problems, hedge fund investors should carefully consider their asset allocation and portfolio strategies. If their fund specializes heavily in investing a single asset such as commodity futures contracts, for example, it might be better to switch over to more diversified approaches such as long bias.

The bias ratio measures the sensitivity of fund returns to changes in price changes for its portfolio underlying assets. While not a perfect measure, as it doesn’t reflect individual asset prices accurately, investors can use the bias ratio as a useful way of evaluating a manager’s pricing policy.

Investors can use fund pricing analysis as a useful way of differentiating among funds within a strategy and can also be an effective means of spotting any issues with its portfolio pricing policy implementation. While in an ideal scenario a Hedge Fund investor would examine each underlying asset that comprises their manager’s portfolio in detail, time constraints make this impractical and infeasible.

This paper investigates the time variation of abnormal returns and Fung-Hsieh alphas for short-biased funds in the Barclay Hedge database. A panel regression is employed to test how fund-specific and market-based factors influence these metrics; higher interest and inflation rates negatively impact risk-adjusted returns while fund-specific factors predominantly impact volatility of abnormal returns.

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Global Macro

Global Macro is a type of hedge fund strategy that invests across markets globally. This may include equity, fixed income, currency and commodity markets. Global Macro strategies typically aim to take advantage of international economic or political events while taking advantage of any market volatility to make a profit.

Success for these funds lies in their managers’ experience and talent, who must comprehend all the factors affecting the portfolio, such as currency changes, interest rate movements, tariffs, monetary policies and major events that may impact it.

Global macro fund managers must possess the expertise to identify those holdings which are most likely to generate returns while simultaneously mitigating risks. The top global macro fund managers possess this skill while simultaneously managing risk while producing alpha generation.

Simply put, global macro hedge funds take long or short positions on different market-based and macroeconomic factors like interest rates, currencies, commodities and stock or index futures in order to create high-level bets that might otherwise not be accessible for individual investors.

Hedge fund strategies have historically proven beneficial during times of severe market stress, such as during the credit crisis or Asian financial crisis. Furthermore, they offer greater diversification compared to traditional asset classes like stocks, bonds and commodities.

Global macro hedge fund strategies do not come without their share of challenges, however. If not properly executed or the market becomes too volatile for trading to take place successfully.

Global macro hedge fund managers use various trading strategies that enable them to effectively recognize global market trends, particularly during periods of increased volatility such as rising interest rates or inflation. Such techniques have proven particularly successful.

George Soros has achieved significant returns with this approach; for instance, selling Pound Sterling just before the European Rate Mechanism debacle occurred in 1992 was one of his signature moves.


Event-Driven Hedge Fund Strategies seek to take advantage of opportunities presented by corporate events like mergers, acquisitions, restructurings and bankruptcies by trading using various financial instruments (futures and options) related to these events.

Event driven hedge fund strategies have quickly become one of the most sought-after hedge fund strategies, second only to equity long-short strategies in total allocations. Investors have quickly turned towards event-driven strategies as they shift away from flat market environments to more bearish conditions; their appetite has skyrocketed.

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Over the past three years, event-driven investment strategies have demonstrated impressive performance. Average AUM growth attributed to net capital flows averaged 18% annually (compared with 14% annually for alternative investments).

This sector has experienced great success due to the favorable corporate environment and is projected to stay strong through 2007. 2007 began with record levels of corporate activity driven by private equity deals and acquisitions; since then there has been consolidation within certain industries such as banking that has garnered much interest from event-driven managers.

Additionally, the sector has also benefitted from low interest rates and an improving global economy – conditions which facilitate merger arbitrage strategies and distressed securities strategies.

Even though this strategy can generate directional returns, it is essential to remember that its success cannot always be predicted with certainty. Opportunities may not present themselves right away or investors could take time re-allocating their capital after it arrives.

Event-driven managers use robust risk analysis using modeling and test scenarios in order to take advantage of opportunities when they arise, as well as detect companies which might be experiencing distress and may need liquidation proceedings.

Strategies can also include targeting securities such as corporate bonds and bank debt from companies facing financial difficulty and with potential for improvement, with managers purchasing these debts with hopes that when their fortunes improve they’ll provide a recovery value when creditors can be paid back more easily.

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.