Hedge Fund Strategies

Hedge Funds stared to flourish back in the nineteen eighties while investors hunted for new opportunities outside the securities and bond markets.  The creation of the hedge fund industry can be attributed to sophisticated investors looking for new opportunities to park their money and steer clear of the securities markets. 

Asset allocation is pivotal as an investment strategy.  Many investors realized that by utilizing hedge funds they could diversify their portfolios and leverage the strategies used by hedge funds.  These strategies consist of a broad range of concepts which range from discretionary models to quantitative strategies.   

There are numerous strategies which hedge funds use to maximize their returns.  These strategies consist of long short equity, monetary policy and currency strategies to name a few. 

When hedge fund managers use a short strategy, they are concentrating on initiating along with managing market neutral positions.  To achieve their goals, hedge fund managers will look to take a long position in the stocks that they hold and at the same time take a short position in different stocks.  The objective of the hedge fund is to duplicate the notional value of their long positions with that of the notional value of their short positions. 

Hedge funds which engage in equity long/short strategies utilize this type of strategy with the idea that they can obtain undervalued securities and short overvalued securities.  The goal is to have your long positions increase in value, while the short positions drop in value.  The strategy will be successful as long as the long positions increase more than the short and or the short positions decease more than the long positions. 

When working with a global macro hedge fund the investor should expect the fund to focus on both economic and monetary policy variation which will create directional variation in currencies, commodities, interest rates and equity indexes. 

The tools/financial instruments implemented within the global macro domain vary from cash positions to ETF’s which follow certain indexes.  Typically, a global macro strategy is deemed a discretionary strategy where management will utilize several different strategies to create an investment thesis. 

When hedge funds utilize currency strategies they will usually focus on the strength of one specific currency verses another.  The managers trade foreign exchange through the use of currency pairs.  A currency pair is basically one countries currency verses/relative to another countries currency. 

The most liquid currency pairs are typically those that include the US dollar.  When the US dollar is not used in a pair this is what is known as cross currency pairs.  When utilizing forex as part of your trading strategy, there is a strong benefit to this.  There is a great deal of leverage that can be utilized when working with forex and with the dollars that a hedge fund can pony up.  In addition, currency instruments also include ETF’s which track specific futures contract, currency pairs, and over the counter pairs. 

Currency instruments include ETF’s which follow specific currencies pairs, futures contracts, along with over the counter currency pairs.

In closing, hedge funds have an enormous number of investment strategies which they can use to generate health returns to their clients.   As high net investors look for ways to make additional returns on their dollar they have the option of turning to hedge funds to leverage their money.