Aggressive Growth:
Invests in equities expected to experience acceleration in growth of
earnings per share. Generally high P/E ratios, low or no dividends; often
smaller and micro cap stocks which are expected to experience rapid growth.
Includes sector specialist funds such as technology, banking, or biotechnology.
Hedges by shorting equities where earnings disappointment is expected
or by shorting stock indexes. Tends to be "long-biased."
Expected Volatility: High
Distressed Securities
Buys equity, debt, or trade claims at deep discounts of companies in
or facing bankruptcy or reorganization. Profits from the market's lack
of understanding of the true value of the deeply discounted securities
and because the majority of institutional investors cannot own below investment
grade securities. (This selling pressure creates the deep discount.) Results
generally not dependent on the direction of the markets.
Expected Volatility: Low - Moderate
Emerging Markets:
Invests in equity or debt of emerging (less mature) markets that tend
to have higher inflation and volatile growth. Short selling is not permitted
in many emerging markets, and, therefore, effective hedging is often not
available, although Brady debt can be partially hedged via U.S. Treasury
futures and currency markets.
Expected Volatility: Very High
Funds of Hedge Funds:
Mix and match hedge funds and other pooled investment vehicles. This
blending of different strategies and asset classes aims to provide a more
stable long-term investment return than any of the individual funds. Returns,
risk, and volatility can be controlled by the mix of underlying strategies
and funds. Capital preservation is generally an important consideration.
Volatility depends on the mix and ratio of strategies employed.
Expected Volatility: Low - Moderate - High
Income:
Invests with primary focus on yield or current income rather than solely
on capital gains. May utilize leverage to buy bonds and sometimes fixed
income derivatives in order to profit from principal appreciation and
interest income.
Expected Volatility: Low
Macro:
Aims to profit from changes in global economies, typically brought about
by shifts in government policy that impact interest rates, in turn affecting
currency, stock, and bond markets. Participates in all major markets --
equities, bonds, currencies and commodities -- though not always at the
same time. Uses leverage and derivatives to accentuate the impact of market
moves. Utilizes hedging, but the leveraged directional investments tend
to make the largest impact on performance.
Expected Volatility: Very High
Market Neutral - Arbitrage:
Attempts to hedge out most market risk by taking offsetting positions,
often in different securities of the same issuer. For example, can be
long convertible bonds and short the underlying issuers equity. May also
use futures to hedge out interest rate risk. Focuses on obtaining returns
with low or no correlation to both the equity and bond markets. These
relative value strategies include fixed income arbitrage, mortgage backed
securities, capital structure arbitrage, and closed-end fund arbitrage.
Expected Volatility: Low
Market Neutral - Securities Hedging:
Invests equally in long and short equity portfolios generally in the
same sectors of the market. Market risk is greatly reduced, but effective
stock analysis and stock picking is essential to obtaining meaningful
results. Leverage may be used to enhance returns. Usually low or no correlation
to the market. Sometimes uses market index futures to hedge out systematic
(market) risk. Relative benchmark index usually T-bills.
Expected Volatility: Low
Market Timing:
Allocates assets among different asset classes depending on the manager's
view of the economic or market outlook. Portfolio emphasis may swing widely
between asset classes. Unpredictability of market movements and the difficulty
of timing entry and exit from markets add to the volatility of this strategy.
Expected Volatility: High
Opportunistic:
Investment theme changes from strategy to strategy as opportunities arise
to profit from events such as IPOs, sudden price changes often caused
by an interim earnings disappointment, hostile bids, and other event-driven
opportunities. May utilize several of these investing styles at a given
time and is not restricted to any particular investment approach or asset
class.
Expected Volatility: Variable
Multi Strategy:
Investment approach is diversified by employing various strategies simultaneously
to realize short- and long-term gains. Other strategies may include systems
trading such as trend following and various diversified technical strategies.
This style of investing allows the manager to overweight or underweight
different strategies to best capitalize on current investment opportunities.
Expected Volatility: Variable
Short Selling:
Sells securities short in anticipation of being able to rebuy them at
a future date at a lower price due to the manager's assessment of the
overvaluation of the securities, or the market, or in anticipation of
earnings disappointments often due to accounting irregularities, new competition,
change of management, etc. Often used as a hedge to offset long-only portfolios
and by those who feel the market is approaching a bearish cycle. High
risk.
Expected Volatility: Very High
Special Situations:
Invests in event-driven situations such as mergers, hostile takeovers,
reorganizations, or leveraged buyouts. May involve simultaneous purchase
of stock in companies being acquired, and the sale of stock in its acquirer,
hoping to profit from the spread between the current market price and
the ultimate purchase price of the company. May also utilize derivatives
to leverage returns and to hedge out interest rate and/or market risk.
Results generally not dependent on direction of market.
Expected Volatility: Moderate
Value:
Invests in securities perceived to be selling at deep discounts to their
intrinsic or potential worth. Such securities may be out of favor or underfollowed
by analysts. Long-term holding, patience, and strong discipline are often
required until the ultimate value is recognized by the market.
Expected Volatility: Low - Moderate
Related Reading:
A Hedge Fund Manager
What
is a Hedge Fund?
Hedge
Fund Performance
Fund
of Funds
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