Hedgucation
Hedge Fund Strategies
The hedge fund universe includes a number of broad strategies, each with multiple approaches, presenting unique opportunities for investors. Here are a few of the more popular strategies:
1. Equity Long/Short - Unlike traditional long-only strategies, in this strategy the fund manager will make use of both long and short positions in equity to mitigate total net market exposure. The low net exposure provides downside protection, while the manager's ability to select stocks can also deliver significant upside as well.
2. Equity Market-Neutral - In the equity market-neutral strategy, the manager balances his/her long and short equity positions, leaving a net "exposure" or "beta" to the market of zero. The systematic gains or losses on long positions are, in principle at least, offset by the systematic losses or gains on short positions, meaning that the market, or systematic, risk is minimized. The employment of stock picking, though, allows an astute manager to make money from both rising long positions and falling short positions simultaneously, regardless of the market's direction. The total effect is that returns should be a function much less of the market's direction, and much more of the manager's skill in valuing stocks, whether going long or short on them.
3. Credit Long/Short - Similar to its equity counterpart, this strategy takes both long and short positions in fixed income securities, especially those that are particularly sensitive to the credit status of the issuer. One oft-employed technique in this strategy involves the use of "positive carry," which exploits opportunities where the cost of borrowed funds is lower than the return earned from a "secure" investment like government bonds.
4. Event-driven - This strategy emphasizes the selection of securities that will experience a change in valuation due to upcoming corporate events, such as leveraged buyouts, changes in the industry, and filing for bankruptcy protection, among others. Managers will assess the probabilities of various outcomes, and based on such analyses will take their positions--either long or short-accordingly.
5. Merger Arbitrage - Merger Arbitrage is a type of Event-driven strategy that focuses specifically on mergers. Often in a merger, the spread between the prices of the acquiring and target firms' stocks narrows. A manager will thus purchase shares of the target company while shorting the stock of the acquiring company. If the merger goes through, the manager will make money off of both the long and short positions as the stock prices of the respective companies converge.
6. Global Macro - This strategy, which potentially encompasses all others, makes use of macroeconomic principles to attempt to find mispricings that can be located in markets anywhere in the world. Positions might be taken on equities, currencies, interest rates and commodity markets. Generally speaking, macro traders seek out-of-the-ordinary price fluctuations that leave prices far from their equilibrium.
7. Managed Futures - The Managed Futures strategy is based on taking positions in the futures markets, in anything from commodities to currencies to interest rates. Managers will go either long or short on particular positions, depending on their research and sentiment, and will often make use of leverage.
8. Convertible Arbitrage - Convertible arbitrage employs arbitrage principles by applying them to convertible bonds, a type of corporate bond for which the investor has the option of converting the bond into equity. Managers exploit these issues by purchasing them when the equity component is priced in such a way that the manager can go on to acquire company stock at a discount to its present market value, subsequently selling it for a risk-free profit.
As the provider of a family of multi-manager, multi-strategy funds of funds, Artemis takes advantage of a number of these strategies. At any given time, we can be significantly invested in long/short and market-neutral equity strategies, managed futures strategies, event-driven strategies and even strategies not mentioned here. By diversifying in this way, our investors are able to hold onto the strong upside of various hedge fund strategies while nevertheless diluting the risk that arises from any single strategy used in isolation. And by being "hedged," market exposure (beta) is kept to a minimum, making our funds a true alternative, and a great compliment to long-only fixed income and equity strategies, as well as other alternatives like real estate, commodities and private equity.