Complete Guide To Investment Companies, Funds And REITs

AAA

Hedge Funds - Directional Or Tactical Strategies

The largest group of hedge funds uses directional or tactical strategies. One example is the macro fund, made famous by George Soros and his Quantum Fund, which dominated the hedge fund universe and newspaper headlines in the 1990s. Macro funds are global, making "top-down" bets on currencies, interest rates, commodities or foreign economies. Because they are for "big picture" investors, macro funds often do not analyze individual companies.

Here are some other examples of directional or tactical strategies:

  • Long/short strategies combine purchases (long positions) with short sales. For example, a long/short manager might purchase a portfolio of core stocks that occupy the S&P 500 and hedge by selling (shorting) S&P 500 Index futures. If the S&P 500 goes down, the short position will offset the losses in the core portfolio, limiting overall losses.

  • Market neutral strategies are a specific type of long/short with the goal to negate the impact and risk of general market movements, trying to isolate the pure returns of individual stocks. This type of strategy is a good example of how hedge funds can aim for positive, absolute returns even in a bear market. For example, a market neutral manager might purchase one hardware company and simultaneously short another, betting that the former will outperform the latter. The market could go down and both stocks could go down along with the market, but as long as the former outperforms the latter, the short sale on first company will produce a net profit for the position.

  • Dedicated short strategies specialize in the short sale of overvalued securities. Because losses on short-only positions are theoretically unlimited (because the stock can rise indefinitely), these strategies are particularly risky. Some of these dedicated short funds are among the first to foresee corporate collapses; the managers of these funds can be particularly skilled at scrutinizing company fundamentals and financial statements in search of red flags.
Performance


Related Articles
  1. Options & Futures

    Hedge Funds Hunt For Upside, Regardless Of The Market

    Hedge funds seek positive absolute returns, and engage in aggressive strategies to make this happen.
  2. Mutual Funds & ETFs

    Types Of Hedge Funds

    Types Of Hedge Funds
  3. Mutual Funds & ETFs

    The Multiple Strategies Of Hedge Funds

    Hedge fund investors or potential investors need to understand how much risk hedge funds take in making money.
  4. Investing Basics

    Hedging Risk for Beginners: How and When to Do It

    Hedging risk is always a good idea. Here is how sophisticated investors go about it.
  5. Mutual Funds & ETFs

    Evaluating Hedge Fund Performance

    Most investors are aware of hedge funds, but many don't know the dirty details of this unique investment type.
  6. Mutual Funds & ETFs

    Hedge Funds: Strategies

    By Dan BarufaldiHedge funds use a variety of different strategies, and each fund manager will argue that he or she is unique and should not be compared to other managers. However, we can group ...
  7. Mutual Funds & ETFs

    Hedge Funds: Performance Measurement

    By Dan BarufaldiIf you read the description of most hedge fund investment objectives, there is usually some mention of absolute returns. It is this goal that makes hedge funds so attractive, ...
  8. Mutual Funds & ETFs

    Hedge Fund Balance Sheet Example

    What once was a niche investment vehicle for the ultra-rich, the hedge fund industry has grown to more than $2.5 billion in assets under management.
  9. Trading Strategies

    Understanding Long/Short Equity

    A long/short equity investing strategy takes long positions on stocks that are expected to appreciate, and short positions on stocks expected to decline.
  10. Mutual Funds & ETFs

    Benchmarks

    Benchmarks
RELATED TERMS
  1. Long/Short Equity

    An investing strategy of taking long positions in stocks that ...
  2. Long/Short Fund

    A type of mutual fund that mimics some of the trading strategies ...
  3. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, ...
  4. Long-Short Ratio

    The amount of a security available for short sale compared to ...
  5. Dedicated Short Bias

    A hedge fund strategy that maintains a net short exposure to ...
  6. Equity Market Neutral

    A hedge fund strategy that seeks to exploit differences in stock ...
RELATED FAQS
  1. What is a long-short mutual fund?

    A Long-Short Fund is a mutual fund that holds investments long and in addition it sells securities it does not own (short). ... Read Answer >>
  2. How do hedge funds determine what assets to own?

    Learn about the various types of investments that hedge fund managers use, and explore basic hedge fund management trading ... Read Answer >>
  3. How do hedge funds use short selling?

    Learn how hedge funds use short selling to profit from stocks that are falling in price. Explore different analytical techniques ... Read Answer >>
  4. What does a hedge fund do?

    Read how hedge funds differ from other investment vehicles and how their investment strategies make them unique and potentially ... Read Answer >>
  5. What is the purpose of a hedge fund?

    Find out what a hedge fund is, how it is set up and why it is different than other forms of investment partnerships like ... Read Answer >>
  6. Can you invest in hedge funds?

    Read about what it takes to invest in a hedge fund, and learn how some investors find ways to indirectly capture a hedge ... Read Answer >>

You May Also Like

Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center