Hedge Fund Strategy is the backbone of any hedge fund because it is what determines the rate of return of a specific fund. These are not static in nature and change with change in condition of the market. Hedge Fund Strategy involves all types of tools and instruments required for investment such as hedging, leveraging and arbitraging. The tools generally used by the fund managers in this end involves long and short positions, use of
options (both call and put), futures and other derivatives.
Now, let us discuss some of the
Hedge Fund Strategies generally adopted by the
fund managers of the hedge fund companies :-
Futures
Futures are one of the most utilized derivative products and are one of the most popular Hedge Fund Strategy too. In case of these the underlying security is often the equity ones and many a times they are also of other financial assets like indices, currencies, commodities, etc. These are contracts which give an investor the opportunity of taking either a leveraged position for the extraction of maximum profit or a hedged position for minimizing the risks associated with the portfolio. These contracts can either be
Hedging by utilizing both the instruments of long as well as short positions on the financial asset in the form of equities.
This hedging technique is entirely dependent on the quality of selection of the equity shares. The tools that the fund managers utilize in this are the opposite positions namely the long positions and short positions. But there might be certain biases towards certain positions. The leveraging positions are either avoided in such strategies or are used in very low degrees.
Fund of Funds
The fund managers may invest in other hedge funds instead of investing in the instruments available in the market such as equity shares, bonds, etc. The tools used in such Hedge Fund Strategy is the long and short position but not on the conventional instruments but on the hedge funds. It has been observed that the volatility factor associated with the fund of funds is less than the ones where the funds are managed by a particular fund manager..
Emerging Market
This strategy is especially applicable for the investments related to the developing countries such as China, India, Brazil and Russia. The hedge fund managers pounce upon the equity shares and the bonds of these markets for extracting maximum profit out of it.
Securities of the distressed type
The fund managers many a times invest in the stocks or debt instruments of those companies which are on the verge of bankruptcy. They generally do it because they expect a turn around in case of such companies.