There are various types of hedge funds available, each having distinct strategies. The following are the most common types and strategies you may want to know.
Short or long equity intends to find chances to gain profits through expected price movement, both upside and downside. This strategy works by taking long positions in stocks viewed as relatively underpriced, and short stocks regarded as overpriced will be sold.
Equity Market Neutral (EMN)
EMN funds are used in the hope of achieving positive returns no matter the market is good or bad. A manager with a strategy of the EMN fund tries to find differences in stock prices. The stocks may have similar features. For instance, they may have similar market capitalization, or they may be historically related. Sometimes the stocks are in the same sector or industry.
Merger Arbitrage, also called risk arb, allows people to buy and sell the stocks of two merging companies at the same time. This can help investors make profits with less risk. Managers with this type of hedge fund can also review if a merger is closing on time.
The holdings of global macro funds are mainly based on many countries’ entire economic and political views as well as the macroeconomic principles. Commodities, futures markets, currency can all be included in holdings.
This strategy intends to gain profits through the difference between an asset’s predicted future price volatility and the implied volatility of options based on of the asset. Options and other kinds of derivative contracts are used in this fund.
Convertible Bond Arbitrage
With a convertible bond arbitrage, long and short positions can be taken simultaneously in a convertible bond as well as its underlying stock. People with the proper hedge between long and short positions try to gain profits via market movement.