Other issues include lack of full underlying investment transparency/attribution, higher cost allocations associated with the establishment and maintenance of the fund investment structures, and generally longer–lived investment commitment periods with limited redemption availability. It also provides a framework for classifying and evaluating these strategies based on their risk profiles. There are many different hedge fund investment strategies available to hedge fund managers. Merger arbitrage strategies have return profiles that are insurance-like, plus a short put option, with relatively high Sharpe ratios; however, left-tail risk is associated with otherwise steady returns.
This is an ongoing industry debate. Diverse investment styles include value/growth, large cap/small cap, discretionary/quantitative, and industry specialization. Key characteristics distinguishing hedge funds and their strategies from traditional investments include the following: 1) lower legal and regulatory constraints; 2) flexible mandates permitting use of shorting and derivatives; 3) a larger investment universe on which to focus; 4) aggressive investment styles that allow concentrated positions in securities offering exposure to credit, volatility, and liquidity risk premiums; 5) relatively liberal use of leverage; 6) liquidity constraints that include lock-ups and liquidity gates; and 7) relatively high fee structures involving management and incentive fees. Convertible arbitrage managers typically run convertible portfolios at 300% long vs. 200% short. In addition, each hedge fund strategy area tends to introduce different types of added portfolio risks. If you use the site without changing settings, you are agreeing to our use of cookies. This reading classifies hedge fund strategies by the following categories: equity-related strategies; event-driven strategies; relative value strategies; opportunistic strategies; specialist strategies; and multi-manager strategies. This reading presents the investment characteristics and implementation for the major categories of hedge fund strategies.
This reading uses such a model that incorporates four factors for assessing risk exposures in both normal periods and market stress/crisis periods: equity risk, credit risk, currency risk, and volatility risk. Equity L/S strategies are typically liquid and generally net long, with gross exposures at 70%–90% long vs. 20%–50% short (but they can vary). In liquidation, the firm’s assets are sold off and securities holders are paid sequentially based on priority of their claims—from senior secured debt, junior secured debt, unsecured debt, convertible debt, preferred stock, and finally common stock. FoFs offer a potentially more diverse strategy mix, but they have less transparency, slower tactical reaction time, and contribute netting risk to the FoF investor. Both strategies are highly liquid and use high leverage.
. For example, to achieve meaningful return objectives, arbitrage-oriented hedge fund strategies tend to utilize significant leverage that can be dangerous to limited partner investors, especially during periods of market stress.
Equity market-neutral strategies exhibit relatively modest return profiles. Outright shorts or hedged positions are possible, but distressed securities investing is usually long-biased, entails relatively high levels of illiquidity, and has moderate to low leverage. CFA Program
The main focus here is, of course, March performance, where U.S equities crashed more than 30% within a 4 week window, but many hedge fund strategies have shown considerable resistance, with CTA and Fixed Income indices winning the …
The basic tradeoff is whether the added fees typically involved with hedge fund investing result in sufficient additional alpha and portfolio diversification benefits to justify the high fee levels.
The focus in both cases is usually on single equity stock picking, as opposed to index shorting, and using little if any leverage.