Hedge funds produce some excellent compounded yearly returns. However, these gains depend on your ability to appropriately utilize Hedge fund strategies to generate those beautiful returns for your clients.
While most hedge funds utilize Equity Strategy, others use Macro Strategy, Relative Value, Event-Driven, etc. You can also learn about these methods by following the markets, investing, and always learning. India, Australian, and London based hedge funds allow different strategies to generate returns for the clients in their respective areas.
Long/Short Equity Strategy
The investment manager maintains long and short stock and equity derivatives positions in this sort of Hedge Fund Strategy.
As a result, the fund management will buy companies they believe are undervalued and sell those they believe are overvalued. London based hedge funds follow this strategy of hedge funds.
To make an investment decision, a variety of strategies are used. It includes quantitative as well as fundamental methods. However, most managers do not hedge their whole long market value with short bets.
Strategy for Market Neutrality
On the other hand, market-neutral strategies aim for zero net-market exposure, meaning that shorts and longs have equal market value.
In this situation, the managers earn their whole profit through stock selection.
This method has a lesser risk than the first strategy we described but has lower predicted profits.
Arbitrage Strategy for Mergers
In such a hedge fund approach, the stocks of two merging companies are acquired and sold simultaneously to generate a risk-free profit.
This hedge fund approach considers the possibility that the merger deal may take time. This is what happens as a result of this minor uncertainty.
When the merger is completed, the target company’s trade stock is discounted to the combined entity’s price. The arbitrageur profits from the differential. The merger arbitrageurs who have been approved and the time it will take to close the deal. US and London based hedge funds follow these strategies to receive returns for their clients.
Arbitrage in Convertibles
Hybrid security combines an equity option with a bond. A convertible arbitrage hedge fund holds long convertible bonds while shorting a part of the shares they convert into. In layman’s words, it consists of a long position in bonds and a short one in common stock or shares.
It seeks to profit from price errors in the conversion factor, i.e., from mispricing between an underlying stock and a convertible bond.
Conclusion
There are numerous techniques that market participants examine. Still, to comprehend the best hedge fund strategies, it is necessary to understand each strategy’s pros and drawbacks and learn which would be useful in which situation. India, China, the US, and London based hedge funds are some of the various areas that adhere to different strategies.
