8 Hedge Fund Investing Strategies You Need To Know

Do you know which investment strategies you would utilize if you ran your own hedge fund? Here is a short overview of some of the most common hedge fund strategies:

Long/Short Equity 

In the Long/Short equity strategy, you buy equities that you expect will increase in value and sell short equities you expect will decrease in value. Although similar to market neutral, a long-short strategy is different as it specifically aims to exploit differences in stock prices by being long and short closely related stocks with similar characteristics.

Market Neutral

With the market-neutral strategy, you would attempt to make a profit regardless of market conditions by simultaneously taking long and short positions. This strategy aims to avoid risk and enables you to profit from either an increase OR a decrease in stock prices.  

Global Macro

In the Global Macro strategy you would analyze and bet on major global, national, or regional macroeconomic events. These might include moves in interest rates, currencies, political events, demographic shifts, economic cycles, and international relations.

Event-Driven

If you plan to use an Event-Driven strategy you would make sure to keep your eye on corporate events (bankruptcy, earnings, mergers/acquisitions, takeovers, and spin-offs) so you can monitor the possibility of pricing inefficiencies around the time of the event.

Merger Arbitrage

If you learn that a merger is likely to happen, you would aim to make a profit by buying and selling the stock of the merging companies. You would then analyze the probability of the deal closing and determine if the stock prices accurately reflect this probability. If not, there’s an opportunity to make money on the mis-pricing with a merger arbitrage strategy. 

Convertible Arbitrage

Oftentimes tricky to get right, with convertible arbitrage you aim to capitalize specifically on the pricing inefficiency between the stock and the convertible bond by being long on the convertible security and short the underlying common stock.

Short-Only

When you feel particularly bearish you can use the short-only strategy to bet against the market. If you anticipate that the market price for a particular stock will decline, you can short the stock and hopes you’re right.

Quantitative

When you employ the quant strategy, you would let go of your own emotion and rely on quantitative analysis using mathematical and statistical modeling to make investing decisions for your fund.

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