Hedge funds are investment funds that are illiquid and require a larger initial investment than other types of investments but use market opportunities to their advantage. With hedge funds being quite different from other investment types, there are several types of strategies to use when trying to maximize the value of a hedge fund. Below we discuss how to maximize multiple hedge fund strategies.
A few hedge fund strategies are:
Long/Short Equity Strategy
For a long/short equity head fund strategy, the investor must have long and short positions in equity. To do this, you will need to purchase stocks that are undervalued and sell stocks that are overrated. You will also need to be betting on both the “winner” and “loser”. By diversifying your bets, you will improve your opportunities for stock-specific gains and reduce your risk.
With a market-neutral hedge fund strategy, the goal is to target a zero net-market exposure. Zero net-market exposure means that shorts and longs will have equal market value. For example, a fund manager may go long in stocks expected to outperform and go short in stocks that may underperform all in the same market sector, so the gains and losses will offset each other. This is a lower-risk strategy that has long/short equity but also has a lower return rate.
Merger arbitrage is a riskier version of market neutral by the main form of returns being from takeover activity. With this strategy, the stocks of two companies that are merging are bought at the same time and sold to build a riskless profit. The risk that is held in this strategy is the risk that the merger deal will not close on time or at all.
However, instead of having a hedge fund that focuses on one strategy, you can have multi-strategy hedge funds. Multi-strategy hedge funds are the most diverse portfolios you can have since they combine several different single hedge fund strategies into one fund. Typically, these hedge funds have long/short, relative value, and event-driven strategies.
The goal of multi-strategy hedge funds is to provide a less volatile return stream to its investors. By diversifying its assets in all aspects of the market with credit, equities, and derivatives, they’re able to provide a lower risk. There is also the option to have these strategies specific and closely defined or broad, depending on the hedge fund manager. Multi-strategy funds are
A multi-strategy hedge fund is the best way to have a balance between risk and return for your investment.
As an investor, you should commit time to doing your due diligence before committing to any type of hedge fund. To have another level of understanding about hedge funds and different strategies, have an advisor from Firethorn Wealth partners on your side. A knowledgeable and experienced financial advisor can be a game changer when it comes to your investments. Schedule a consultation with us today to get started.