In many but not all cases, portfolios are constructed to be neutral to one or multiple variables, such as broader equity markets in dollar or beta terms, and leverage is frequently employed to enhance the return profile of the positions identified. Factor-based investment strategies include strategies in which the investment thesis is predicated on the systematic analysis of common relationships between securities. These can include both Factor-based and Statistical Arbitrage/Trading strategies. In contrast to special situations, distressed strategies employ primarily debt (greater than 60%) but also may maintain related equity exposure.Įquity Market Neutral strategies employ sophisticated quantitative techniques of analyzing price data to ascertain information about future price movement and relationships between securities, select securities for purchase and sale. Managers employ fundamental credit processes focused on valuation and asset coverage of securities of distressed firms in most cases portfolio exposures are concentrated in instruments which are publicly traded, in some cases actively and in others under reduced liquidity but in general for which a reasonable public market exists. Managers are typically actively involved with the management of these companies, frequently involved on creditors’ committees in negotiating the exchange of securities for alternative obligations, either swaps of debt, equity or hybrid securities. Activist strategies are distinguished from other Event Driven strategies in that, over a given market cycle, Activist strategies would expect to have greater than 50% of the portfolio in activist positions, as described.ĭistressed/Restructuring strategies employ an investment process focused on corporate fixed income instruments, primarily on corporate credit instruments of companies trading at significant discounts to their value at issuance or obliged (par value) at maturity as a result of either formal bankruptcy proceeding or financial market perception of near term proceedings. These involve both announced transactions as well as situations which pre-, post-date or situations in which no formal announcement is expected to occur. Strategies employ an investment process primarily focused on opportunities in equity and equity related instruments of companies which are currently or prospectively engaged in a corporate transaction, security issuance/repurchase, asset sales, division spin-off or other catalyst oriented situation. There is also a business incentive to seek to preserve capital during riskier times.Īctivist strategies may obtain or attempt to obtain representation of the company’s board of directors in an effort to impact the firm’s policies or strategic direction and in some cases may advocate activities such as division or asset sales, partial or complete corporate divestiture, dividend or share buybacks, and changes in management. Managers are incentivized to deliver returns as the their compensation is typically heavily weighted towards performance. Hedge fund managers often invest a significant amount of their own money in their fund giving them “skin in the game”. They have the ability to deliver non-correlated returns due to their use of flexible investment options and methods such as short selling and derivatives (e.g., puts, calls, options, futures, etc.) that may reduce risk or even achieve positive returns when markets are falling. Hedge funds invest in a broad range of assets including stocks, bonds, options, currencies and commodities and may utilize a variety of financial instruments to reduce risk, enhance returns and minimize the correlation with equity and bond markets. Hedge fund managers typically are highly specialized and trade within their areas of expertise and competitive advantage. Hedge funds vary in terms of investment strategies, returns, volatility and risk.
Hedge funds are similar to mutual funds in that they are pooled and professionally managed, but differ in that the funds cater to qualified investors and have more flexibility in their investment strategies. What are Hedge Funds and how do they differ from Traditional Investments?Ī hedge fund is a private pool of capital managed by an investment advisor.
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