Hf Industry Guide
September 2008
Hedge Fund Strategies Guide
By Michael Bartolo (MBA 10)
Hedge Fund Strategies Guide
By Michael Bartolo (MBA 10)
Equity Hedge or Non-Hedge
Equity fund strategies can be split into two general categories, Hedge and Non-Hedge. The overlying concept involves the allocation of funds under management to equities that will outperform the market. The unique characteristic that differentiates both hedge and non-hedge funds from traditional long-only equity funds (i.e. mutual funds) is the use of leverage. Leverage is practical when the rate of return on the investment is higher than the interest rate of borrowed funds. Leverage can substantially multiply the rate of return or loss of a fund. A hedge strategy incorporates the use of short selling and derivatives to minimize exposure to overall market risk. In strong market conditions (bull market) funds may have net long exposure, meaning the percentage of assets held in long positions is greater than that of assets held in short positions. In this scenario, the objective is for long positions to outperform the market, while short positions underperform the market. Short positions can be taken in individual equities (usually in companies within the same industry as a particular long position), in market indices, or in exchange traded funds (ETF’s – encompasses a group of equities associated with a certain sector). The short positions can either create a profit for the fund, or act as protection for the fund in the event of a market decline. In a weaker market (bear market) funds may choose to decrease net long exposure or have net short exposure, meaning a greater percentage of assets are allocated to short sales of equities of companies that are expected to decline at a greater rate than the overall market. Similarly, long holdings are expected to either appreciate or decline at a slower rate than the market. A non-hedge strategy incorporates stock picking techniques that outperform the market,
Hedge Fund Strategies Guide
By Michael Bartolo (MBA 10)
Hedge Fund Strategies Guide
By Michael Bartolo (MBA 10)
Equity Hedge or Non-Hedge
Equity fund strategies can be split into two general categories, Hedge and Non-Hedge. The overlying concept involves the allocation of funds under management to equities that will outperform the market. The unique characteristic that differentiates both hedge and non-hedge funds from traditional long-only equity funds (i.e. mutual funds) is the use of leverage. Leverage is practical when the rate of return on the investment is higher than the interest rate of borrowed funds. Leverage can substantially multiply the rate of return or loss of a fund. A hedge strategy incorporates the use of short selling and derivatives to minimize exposure to overall market risk. In strong market conditions (bull market) funds may have net long exposure, meaning the percentage of assets held in long positions is greater than that of assets held in short positions. In this scenario, the objective is for long positions to outperform the market, while short positions underperform the market. Short positions can be taken in individual equities (usually in companies within the same industry as a particular long position), in market indices, or in exchange traded funds (ETF’s – encompasses a group of equities associated with a certain sector). The short positions can either create a profit for the fund, or act as protection for the fund in the event of a market decline. In a weaker market (bear market) funds may choose to decrease net long exposure or have net short exposure, meaning a greater percentage of assets are allocated to short sales of equities of companies that are expected to decline at a greater rate than the overall market. Similarly, long holdings are expected to either appreciate or decline at a slower rate than the market. A non-hedge strategy incorporates stock picking techniques that outperform the market,