Types of Hedge Funds

Are you aware of the advantages of investing in hedge funds? How many popular types of hedge funds are there? In addition to that, what kind of investors should go for hedge funds? Can you name some successful hedge fund investors? Credit Health Care will be showing you the things that you all need to know about in details before you are thinking to make hedge fund investment.


Now, we will be talking about the hedge funds and the ways in which you can make investment in them. More and more seasoned investors are opting for this specific form of investment which has great potential in the future. However, it is important to know that, for being successful in this regard, you need to make quick and right investment strategies. Also, you need to know that, hedge funds can be used for both long and short investment purposes. The most common types of hedge fund types are described for the readers in this blogpost. The kinds of them are namely emerging market funds, directional funds, market-neutral funds, equity arbitrage, macro funds, absolute-return funds, event-driven funds, mixed-strategy funds, distressed securities funds and also long-short funds.

types of hedge funds

What difficulties can one face while dealing with the hedge funds? What kind of knowledge do you need to acquire in terms of hedge funds? For finding more information in relation to the hedge fund market, you must be reading this particular article till the very end.

Emerging Market Funds

Do remember that, this strategy is being followed by a lot of hedge funds. Also, governments in developed countries have now become aware of the volatility that such funds can cause. There are therefore many restrictions in place that limit the amount of investments that such foreign institutional investors can make.

However, their markets are not developed well enough. Hedge funds see this low regulation as an opportunity. Since they have massive amounts of funds at their disposal, hedge funds can literally move these smaller markets single handedly. Also, the emerging market hedge funds needs to be handled with much more care.

Directional Funds

Unlike other hedge funds, the directional funds are exposed, although only somewhat, to the market behavior. However, managers of these funds shoot for above average returns than what was expected, in light of the amount of risk that’s taken. So, one advantage of directional funds is the potential huge gains associated with them.

In addition to that, one other advantage to directional hedge funds is that they have much better access to liquidity than absolute-return funds, and such access is usually determined through the funds being traded on the stock exchange.

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Market-Neutral Funds

You must also note that, the market neutral funds are known to seek returns that are totally independent of market performance. These funds attempt to minimize or eliminate market volatility. Along with that, do always keep in mind that, the strategy would be holding equal long and short positions within the same sector.

In addition to that, the market-neutral funds may use leverage to enhance returns and they may use derivatives to hedge the overall portfolio. Also, be aware of the fact that, the specific form of hedge fund known as market neutral portfolios, do strictly aim for a portfolio beta of 0, which has less chances of any bias outcomes.

Equity Arbitrage

Do note that, there are mortgage backed securities and collateral debt obligations being sold. Also, over the counter derivative products are available for these securities. This strategy is similar to equity arbitrage. The difference being that mortgage products are used instead of equity products. Once again, different positions are taken in different markets to capture the price difference.

In addition to that, a fund purchases convertible securities of a company and shorts the company’s common stock. Convertible securities are equities that pay higher-than-average dividends and that can be traded in for common stock after a mandatory holding period. If the stock price falls, the short position pays off.

Macro Funds

Do note that the global macro funds are among the most diverse types of hedge funds. Moreover, regardless of the investment vehicles that are being used, at the heart of the strategy is making macroeconomic bets and searching for global opportunities. For that very reason, you need to have good knowledge about the market.

In addition to that, these funds look to invest in situations created by changes in government policy, economic policies and interest rates. Also, macro funds tend to use derivatives and can be highly leveraged. It generally bases it’s holdings like long and short positions in various equity, fixed income, currency, commodities along with futures markets.

Absolute-Return Funds

Do note that, this specific fund is created specifically to give you a consistent return on your investment regardless of any market fluctuations. Thus, the manager of these funds will attempt to eradicate any risk involved with the fund so as to be sure the fund does not reflect what is happening in the marketplace.

In addition to that, these funds are quite flexible, with creative techniques such as short-selling and derivatives to provide good, high returns for those who have invested in them. However, this fund’s performance is entirely based on the level of skill of the manager, thus the dependence level of these funds is high.

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Event-Driven Funds

As the name suggests, the event-driven funds are generally driven by certain market events. You must always keep in your mind that , the major corporate events such as mergers, acquisitions and bankruptcies create a lot of movement in the stock market and the hedge funds are known to take advantage of such movements.

In addition to that, hedge funds hire analysts that have been trained to quickly ascertain the value of companies in the middle of crisis. These funds then try to acquire shares which are undervalued whereas selling overvalued companies simultaneously. Hedge funds usually take both long and short positions since they are not averse to risk.

Mixed-Strategy Funds

Do keep in mind that, this fund also accumulates money from investors just like other hedge funds. However, the operations of this fund are not similar to other hedge funds. This is because the investing strategy of this fund is passive. This means that these funds simply give away the money to other hedge funds.

Moreover, there is no active trading but instead periodic and passive monitoring of the performance given by other funds. Such funds happy the opportunity to diversify their portfolio to avoid the riskiness inherent in hedge fund positions. The dangers posed by leverage are somewhat offset by this diversification.

Distressed Securities Funds

You must remember that the securities of companies that are in distress can be a bargain, but they are also risky as the company may have accumulated a large debt or may potentially face bankruptcy . Also, make a note that, the distressed securities tend to trade at substantial discounts to their intrinsic or par value.

In addition to that, investing in actual distressed companies, by contrast, means that you find firms that are having some type of financial trouble, are unable to fund their debt obligations, or are otherwise on the brink of bankruptcy, and then investing in their capital structure.

Long-Short Funds

Do note that, this strategy consists of purchasing long positions in stocks expected to appreciate in value while short-selling positions in equities expected to fall. The short position is achieved through use of futures or options, allowing the fund to sell equities it never owned and may never intend to purchase.

In addition to that, a 120/20 strategy is one where the fund holds 120 percent long positions and 20 percent short, indicating a general expectation of appreciation in the investments. Along with that, the fund can take a neutral strategy where long positions balance shorts, or choose a long or short bias.

Things To Remember:

So now, you need to understand the fact that your choice of going with a particular form of hedge fund depends on the investment goals that you have, both in the long-term as well as short-term. Moreover, do keep in mind that, various other factors must be considered during your entire investment process. Along with that, in an earlier post, we have discussed about the pros that you must know for investing in bonds market. You must go through the article thoroughly before returning to this part in order to gain more valuable information about investment practices. Thus, the time has arrived for those people who are interested in making plans in hedge fund investment. However, you must share your valuable experience with the readers after you have tried out the things which we told about in the above post in the below comments section without any fail!

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