Strategies Used in Hedge Funds

Strategies Used in Hedge Funds

Hedge funds strategies cover a broad range of risk tolerance and investment philosophies within a wide display of investments, including debt and equity securities, commodities, currencies, derivatives, real estate and other investment vehicles.

The horizon of hedge fund investment strategies has seen unparalleled expansion in recent years. Below are some of the common hedge fund strategies.

Long/Short Equity

One of the most commonly used strategies for startup hedge funds is the long/short equity strategy. This strategy involves taking long and short positions in equity and equity derivative securities. Funds using a long/short strategy employ a wide range of fundamental and quantitative techniques to make investment decisions.

Credit Funds

Credit funds make debt investments based on lending inefficiencies and they tend to follow cyclical patterns and are most active following economic downturns and restrictions in the credit market.

These funds include distressed debt strategies, which involves investment in corporate bonds; fixed-income strategies, which invest in long-term government, bank and corporate bonds and; direct lending and others.


Arbitrage strategies seek to play on visible price differences between closely-related investments by simultaneously purchasing and selling investments. When properly used, arbitrage strategies produce consistent returns with low risk. However, because price inefficiencies between investments tend to be slight, arbitrage funds must rely heavily on leverage to obtain significant returns.

 Strategies Used in Hedge Funds 2

Event Driven

Event-driven strategies closely pertain to arbitrage strategies, seeking to exploit pricing inflation and deflation that occurs in response to specific corporate events, including mergers and takeovers, reorganizations, restructuring, asset sales, spin-offs, liquidations, bankruptcy and other events creating inefficient stock pricing.

Event-driven strategies require knowledge in fundamental modeling and analysis of corporate events. Examples of event-driven strategies include merger arbitrage, risk arbitrage, distressed debt, and event-based capital structure arbitrage.

Quantitative (Black Box)

Quantitative hedge fund strategies rely on quantitative analysis to make investment decisions. Such hedge fund strategies typically utilize technology-based algorithmic modeling to achieve desired investment objectives. Quantitative strategies are often referred to as “black box” funds since investors usually have limited access to investment strategy specifics.

Global Macro

Global macro refers to the general investment strategy making investment decisions based on broad political and economic outlooks of various countries. This strategy involves both directional analysis, which seeks to predict the rise or decline of a country’s economy, as well as relative analysis, evaluating economic trends relative to each other.

Global macro funds are not limited to any specific investment vehicle or asset class and can include investment in equity, debt, commodities, futures, currencies, real estate and other assets in various countries.


Multi-strategy funds are not open to a single investment strategy or objective, but use a variety of investment strategies to achieve positive returns regardless of overall market performance. These funds tend to have a low-risk tolerance and maintain a high priority on capital preservation.

Bottom Line

There are a variety of hedge fund strategies, many of which are not here. Even those strategies that were described above are very simple in terms and can be much more complicated than they seem.

Investors should conduct extensive due diligence before they commit money to any hedge fund, but understanding which strategies the fund uses and its risk profile is an essential first step.

See Also: Hedge Fund: Its Pros and Cons

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