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. Investing

    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. Investing

    The Multiple Strategies Of Hedge Funds

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

    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.
  4. Investing

    Minimize Your Losses With Alternative Strategy Funds

    Discover a strategy that can be used to participate in the market and still protect the downside.
  5. Investing

    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. Investing

    Investment Strategy Case Study: Traditional Vs. Alternatives for 2016

    Learn more about some types of alternative investments and why you should consider adding them in your portfolio in 2016.
  7. Investing

    Hedge Funds: Higher Returns Or Just High Fees?

    Discover the advantages and pitfalls of hedge funds and the questions to ask when choosing one.
  8. Investing

    4 Strategies Only Hedge Funds Dare Use

    Learn why investing strategies employed by hedge funds may result in steep losses and are not appropriate for most retail investors.
Frequently Asked Questions
  1. Does Netspend Accept Wire Transfers?

    Find out how Netspend cardholders can arrange for electronic transfers to add money to their Netspend prepaid debit cards ...
  2. What is Operations Management Theory?

    Historical and modern operations management theory can be used to benefit businesses.
  3. What's a Typical Day for Someone in M&A?

    Financial professionals in M&A have a very specialized role. Check out their typical duties.
  4. Is There a Difference Between the Equity Market and the Stock Market?

    The terms equity market and stock market are synonymous
Trading Center