Hedge Fund Strategies
A hedge fund is a fund which has non traditional investment methods. They try to provide a positive return, regardless of the overall market movement.
For the purposes of the R02 exam the only area on hedge funds that needs to be covered is examples of the different types of fund management styles that are adopted by their managers. Examples include:
Long/short funds – Most popular strategy, by buying and selling equities and bonds to combine long investments and short selling of securities.
Relative Value funds – Rely on arbitrage to create a return.
Event driven funds – Use the movement of prices arising from anticipated events to get a return, so it can be uncorrelated with the markets. Also referred to as a market-neutral strategy.
Tactical trading funds – Trade in a variety of investment types and use a similar strategy to long/short funds.
Questions - Use Your Note Taker To Jot Down Ideas / Calculations
1. Alpha Investments’ hedge fund adopts a market-neutral strategy. This fund is referred to as a[n]:
a) event-driven fund.
b) relative value fund.
c) long/short fund.
d) tactical trading fund.
A)
these hedge funds use the price movements arising from anticipated corporate events to
achieve their returns. This approach tends to be uncorrelated with the markets – it is market-
neutral.
2. A hedge fund which relies on arbitrage to produce returns is known as which type of fund?
a) Trading strategies.
b) Event driven.
c) Long/short.
d) Relative value.
D)
These fund managers rely on arbitrage to make returns. They look for value relative to
elsewhere – that is what arbitrage is.
- Further study text reading: Pages 312-315