Types of hedge funds

What are different types of Hedge Funds?

Hedge funds are a type of alternative investment fund that employ well-planned strategies to protect their overall portfolio while making good profits. Hedge fundsare generally classified into three most popular categories – long-short funds, market-neutral funds, and event-driven funds.

Following are the top three categories of hedge funds: Long-short funds These hedge funds use the long-short investment strategy, which involves taking long positions in stocks whose values are expected to rise and short positions in stocks whosevalues are expected to fall. The main characteristic of long-short funds is that they employ a strategy that tries to minimize stock market exposure while making profits from long positions on stocks and price drop in the short positions. Even if this may not be the scenario every time, long-short funds ensure that their strategy keeps themnet profitable, which means that long positions get more profits than short positions or vice versa.

Market-neutral funds Market-neutral funds are a sub-type of the long-short funds.However,market-neutral funds tend to hedge against general market movements, which is why these hedge funds are named marketneutral. Market-neutral funds are considered aggressive funds that strive hard to provide superior returns to the investors through balancing the bullish stocks that they pick with the bearish stocks. Moreover, these funds can generate income through the interest received on short

securities’ sales. The major goal of market-neutral funds is to provide the investors with consistent returns of 3-7% above those provided by T-bills. An interesting fact about these type of hedge funds is that theyprovide returns similarto leveraged ETFs.These ETFs generally strive to deliver returns in the range of 200-300% on any investment.

Event-driven funds Event-driven hedge fundstryto take advantage of various events that includeM&A andcompany restructuring. These events more often result in mispricing of a company’s stock in the shortterm. Thus, event-driven fundstend to focus on exploiting thisdeclining tendency of companies’ stocks prices. Generally, investors often express concern on occurrence of corporate events such ascompany restructuring, business reorganization, M&A, or other such events. This concern of investors often tends to lead to a stagnation ofthe stock price of that company. This continues until the investors start feeling comfortable again with regards to the company’sbusiness stability. Thus, when an event-driven fund finds potential investments such as the company mentioned above, it willfirst evaluate the company’s underlying value while gathering more inputs on the situation that surroundsan event.This could include potential regulatory loopholes. If the event-driven fundhas a general positive perception or feelingpertainingto the corporate event and the company’s strength, it might buy that company’s shares for sellingthem later when the share price adjusts.

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