Editing Hedge fund (section)

==Strategies==
[[Image:AmericanProspectusSample.jpg|thumb|right|250px|A prospectus from the US]]
Hedge fund strategies are generally classified among four major categories: [[global macro]], directional, [[Event-driven investing|event-driven]], and [[relative value (economics)|relative value]] ([[arbitrage]]).<ref name="Hedge Fund Tools">{{cite web |url=http://www.capitalbeacon.com/Hedge_Fund_Tools.html |title=Hedge Fund Tools – Investment Strategies |publisher=Capital Beacon |access-date=18 March 2011 |archive-url=https://web.archive.org/web/20100929230727/http://www.capitalbeacon.com/Hedge_Fund_Tools.html |archive-date=29 September 2010 |url-status=live |df=dmy-all }}</ref> Strategies within these categories each entail characteristic risk and return profiles. A fund may employ a single strategy or multiple strategies for flexibility, [[risk management]], or diversification.<ref name="Connor">{{cite web|url = https://www.iam.uk.com/Portals/0/pdf/lse-publications/An-Introduction-to-Hedge-Fund-Strategies.pdf|title = An Introduction to Hedge Fund Strategy|first1 = Gregory|last1 = Connor|first2 = Teo|last2 = Lasarte|work = The London School of Economics and Political Science|publisher = International Asset Management Ltd.|access-date = 17 March 2011|archive-url = https://web.archive.org/web/20150513043335/http://www.iam.uk.com/Portals/0/pdf/lse-publications/An-Introduction-to-Hedge-Fund-Strategies.pdf|archive-date = 13 May 2015|url-status = dead|df = dmy-all}}</ref> The hedge fund's [[prospectus (finance)|prospectus]], also known as an [[offering memorandum]], offers potential investors information about key aspects of the fund, including the fund's investment strategy, investment type, and [[leverage (finance)|leverage]] limit.<ref name=Sadek>{{cite web |url=http://www.fortress-strategy.com/Decimation.pdf |title=Decimation of Fortunes: Where Do We Go From Here? |first=Bill |last=Sadek |publisher=Fortress Strategy USA |access-date=17 March 2011 |archive-url=https://web.archive.org/web/20160406133117/http://www.fortress-strategy.com/Decimation.pdf |archive-date=6 April 2016 |url-status=dead |df=dmy-all }}</ref>

The elements contributing to a hedge fund strategy include the hedge fund's approach to the market, the particular instrument use, the [[market sector]] the fund specializes in (''e.g.'', healthcare), the method used to select investments, and the amount of diversification within the fund. There are a variety of market approaches to different [[asset class]]es, including [[Stock|equity]], [[fixed income]], [[commodity]], and [[currency]]. Instruments used include equities, fixed income, [[futures contract|futures]], [[option (finance)|options]], and [[swap (finance)|swaps]]. Strategies can be divided into those in which investments can be selected by managers, known as "discretionary/qualitative", or those in which investments are selected using a computerized system, known as "systematic/quantitative".<ref name=Ineichen192>{{cite book |title=Absolute Returns: the risks and opportunities of hedge fund investing |first=Alexander |last=Ineichen |year=2002 |publisher=John Wiley & Sons |isbn=978-0-471-25120-0 |page=[https://archive.org/details/absolutereturnsr0000inei/page/192 192] |url=https://archive.org/details/absolutereturnsr0000inei/page/192 }}</ref> The amount of diversification within the fund can vary; funds may be multi-strategy, multi-fund, multi-market, multi-manager, or a combination.

Sometimes hedge fund strategies are described as "[[absolute return]]" and are classified as either "[[market neutral]]" or "directional". Market neutral funds have less correlation to overall market performance by "neutralizing" the effect of market swings whereas directional funds utilize trends and inconsistencies in the market and have greater exposure to the market's fluctuations.<ref name=Connor/><ref name=Coggan>{{cite book |title=Guide to Hedge Funds |last=Coggan |first=Philip |year=2011 |publisher=The Economist Newspaper Ltd. |edition=2nd}}</ref>

===Global macro===
{{Main|Global macro}}
Hedge funds using a global macro investing strategy take large [[Position (finance)|positions]] in share, bond, or currency markets in anticipation of global [[Macroeconomics|macroeconomic events]] in order to generate a [[risk-adjusted return]].<ref name=Coggan/> Global macro fund managers use macroeconomic ("big picture") analysis based on global market events and trends to identify opportunities for investment that would profit from anticipated price movements. While global macro strategies have a large amount of flexibility (due to their ability to use leverage to take large positions in diverse investments in multiple markets), the timing of the implementation of the strategies is important in order to generate attractive, risk-adjusted returns.<ref name=Bartolo>{{cite web |url=http://www.cai.emory.edu/documents/HF_Strategies.pdf |title=Hedge Fund Strategies Guide |first=Michael |last=Bartolo |date=September 2008 |work=Goizueta Business School |publisher=Emory University |access-date=17 March 2011 |url-status=dead |archive-url=https://web.archive.org/web/20091128042720/http://cai.emory.edu/documents/HF_Strategies.pdf |archive-date=28 November 2009 |df=dmy-all }}</ref> Global macro is often categorized as a directional investment strategy.<ref name=Coggan/>

Global macro strategies can be divided into discretionary and systematic approaches. Discretionary trading is carried out by investment managers who identify and select investments, whereas [[systematic trading]] is based on [[mathematics|mathematical models]] and executed by [[software]] with limited human involvement beyond the programming and updating of the software. These strategies can also be divided into [[trend following|trend]] or counter-trend approaches depending on whether the fund attempts to profit from following [[market trend]] (long or short-term) or attempts to anticipate and profit from reversals in trends.<ref name=Ineichen192/>

Within global macro strategies, there are further sub-strategies including "systematic diversified", in which the fund trades in diversified markets, or sector specialists such as "systematic currency", in which the fund trades in [[foreign exchange market]]s or any other sector specialisation.<ref name="wavetheory_2010">{{cite book |title=Wave Theory for Alternative Investments |first=Stephen |last=Walker |year=2010 |publisher=McGraw-Hill Companies |isbn=978-0-07-174286-3}}</ref>{{rp|348}} Other sub-strategies include those employed by [[commodity trading advisor]]s (CTAs), where the fund trades in [[Futures contract|futures]] (or [[option (finance)|options]]) in [[commodity]] markets or in swaps.<ref>{{cite book |title=Investment strategies of hedge funds |first=Filippo |last=Stefanini |year=2006 |publisher=John Wiley & Sons |isbn= 978-0-470-02627-4 |page=223}}</ref> This is also known as a "managed future fund".<ref name=Coggan/> CTAs trade in commodities (such as gold) and financial instruments, including [[stock indices]]. They also take both long and short positions, allowing them to make profit in both market upswings and downswings.<ref>{{cite book |title=Evaluating hedge fund performance |last=Tran |first=Vinh Q. |year=2006 |publisher=John Wiley & Sons |isbn=978-0-471-68171-7 |page=54}}</ref> Most global macro managers tends to be a CTA from a regulatory perspective and the main divide is between systematic and discretionary strategies. A classification framework for CTA/Macro Strategies can be found in the reference.<ref>{{cite web|url=https://nilssonhedge.com/database-info/hedge-fund-classification/cta-classification/|title=CTA Classification|date=30 May 2019|access-date=28 July 2019|archive-date=28 July 2019|archive-url=https://web.archive.org/web/20190728145628/https://nilssonhedge.com/database-info/hedge-fund-classification/cta-classification/|url-status=live}}</ref>

===Directional===
[[File:Short (finance).png|thumb|294px|Schematic representation of short selling in two steps. The short seller [[securities lending|borrows shares]] and immediately sells them. The short seller then expects the price to decrease, when the seller can profit by purchasing the shares to return to the lender.]]
Directional investment strategies use market movements, trends, or inconsistencies when picking stocks across a variety of markets. Computer models can be used, or fund managers will identify and select investments. These types of strategies have a greater exposure to the fluctuations of the overall market than do market neutral strategies.<ref name=Connor/><ref name=Coggan/> Directional hedge fund strategies include US and international [[long/short equity]] hedge funds, where [[Long (finance)|long equity]] positions are hedged with [[Short (finance)|short sales]] of equities or equity [[Index (economics)|index]] [[Option (finance)|options]].

Within directional strategies, there are a number of sub-strategies. "[[Emerging markets]]" funds focus on emerging markets such as China and India,<ref name="wavetheory_2010" />{{rp|351}} whereas "sector funds" specialize in specific areas including technology, healthcare, biotechnology, pharmaceuticals, energy, and basic materials. Funds using a "fundamental growth" strategy invest in companies with more [[earnings]] growth than the overall [[stock market]] or relevant sector, while funds using a "[[fundamental value]]" strategy invest in undervalued companies.<ref name="wavetheory_2010" />{{rp|344}} Funds that use [[Statistics|quantitative]] and [[financial signal processing]] techniques for equity [[Trader (finance)|trading]] are described as using a "quantitative directional" strategy.<ref name="wavetheory_2010" />{{rp|345}} Funds using a "[[Short selling|short bias]]" strategy take advantage of declining equity prices using short positions.<ref>{{cite book |title=Create Your Own ETF Hedge Fund |first=David |last=Fry |year=2008 |publisher=John Wiley & Sons |isbn= 978-0-470-13895-3 |page=68}}</ref>

===Event-driven===
{{Main|Event-driven investing}}
Event-driven strategies concern situations in which the underlying investment opportunity and risk are associated with an event.<ref>{{cite book |title=Absolute Returns: the risks and opportunities of hedge fund investing |first=Alexander |last=Ineichen |year=2002 |publisher=John Wiley & Sons |isbn=978-0-471-25120-0 |page=[https://archive.org/details/absolutereturnsr0000inei/page/182 182] |url=https://archive.org/details/absolutereturnsr0000inei/page/182 }}</ref> An event-driven investment strategy finds investment opportunities in corporate transactional events such as consolidations, [[acquisitions]], [[recapitalization]]s, [[Bankruptcy|bankruptcies]], and [[liquidation]]s. Managers employing such a strategy capitalize on [[valuation (finance)|valuation]] inconsistencies in the market before or after such events, and take a position based on the predicted movement of the [[Security (finance)|security]] or securities in question. Large [[institutional investor]]s such as hedge funds are more likely to pursue event-driven investing strategies than traditional equity investors because they have the expertise and resources to analyze corporate transactional events for investment opportunities.<ref name=Bartolo/><ref>{{Cite news|url=https://pugvestor.com/ways-invest-money-stocks/|title=Different ways to invest money in stocks |date=30 March 2017|work=Pugvestor|access-date=14 April 2017|language=en-US|archive-url=https://web.archive.org/web/20180109045554/https://pugvestor.com/ways-invest-money-stocks/|archive-date=9 January 2018|url-status=dead|df=dmy-all}}</ref><ref name=Event-Driven>{{cite web |url=http://www.barclayhedge.com/research/educational-articles/hedge-fund-strategy-definition/hedge-fund-strategy-event-driven.html |title=Understanding Event-Driven Investing |publisher=BarclayHedge Ltd. |access-date=17 March 2011 |archive-url=https://web.archive.org/web/20101230081550/http://www.barclayhedge.com/research/educational-articles/hedge-fund-strategy-definition/hedge-fund-strategy-event-driven.html |archive-date=30 December 2010 |url-status=dead |df=dmy-all }}</ref>

Corporate transactional events generally fit into three categories: [[distressed securities]], [[risk arbitrage]], and [[special situation]]s.<ref name=Bartolo/> [[Distressed securities]] include such events as restructurings, [[recapitalization]]s, and [[Bankruptcy|bankruptcies]].<ref name=Bartolo/> A distressed securities investment strategy involves investing in the bonds or loans of companies facing bankruptcy or severe financial distress, when these [[bond (finance)|bond]]s or [[loan]]s are being traded at a [[discounts and allowances|discount]] to their value. Hedge fund managers pursuing the distressed debt investment strategy aim to capitalize on depressed bond prices. Hedge funds purchasing distressed debt may prevent those companies from going bankrupt, as such an acquisition deters [[foreclosure]] by banks.<ref name=Coggan/> While event-driven investing, in general, tends to thrive during a [[bull market]], distressed investing works best during a [[bear market]].<ref name=Event-Driven/>

[[Risk arbitrage]] or [[merger arbitrage]] includes such events as [[Mergers and acquisitions|mergers]], acquisitions, liquidations, and [[hostile takeover]]s.<ref name=Bartolo/> Risk arbitrage typically involves buying and selling the stocks of two or more merging companies to take advantage of market discrepancies between acquisition price and stock price. The risk element arises from the possibility that the merger or acquisition will not go ahead as planned; hedge fund managers will use research and analysis to determine if the event will take place.<ref name=Event-Driven/><ref>{{cite web |url=http://www.barclayhedge.com/research/educational-articles/hedge-fund-strategy-definition/hedge-fund-strategy-merger-arbitrage.html |title=Understanding Merger Arbitrage |publisher=BarclayHedge Ltd. |access-date=17 March 2011 |archive-url=https://web.archive.org/web/20110315111628/http://www.barclayhedge.com/research/educational-articles/hedge-fund-strategy-definition/hedge-fund-strategy-merger-arbitrage.html |archive-date=15 March 2011 |url-status=live |df=dmy-all }}</ref>

Special situations are events that impact the value of a company's stock, including the [[restructuring]] of a company or corporate transactions including [[Corporate spin-off|spin-off]]s, share [[Share repurchase|buy backs]], security issuance/repurchase, asset sales, or other catalyst-oriented situations. To take advantage of special situations the hedge fund manager must identify an upcoming event that will increase or decrease the value of the company's equity and equity-related instruments.<ref name="Strategy Definitions">{{cite web |url=http://www.hedgefundresearch.com/index.php?fuse=indices-str#2703 |title=HFR I Strategy Definitions |publisher=Hedge Fund Research Inc. |access-date=17 March 2011 |archive-url=https://web.archive.org/web/20110720022439/http://www.hedgefundresearch.com/index.php?fuse=indices-str#2703 |archive-date=20 July 2011 |url-status=live |df=dmy-all }}</ref>

Other event-driven strategies include credit arbitrage strategies, which focus on corporate [[fixed income]] securities; an activist strategy, where the fund takes large positions in companies and uses the ownership to participate in the management; a strategy based on predicting the final approval of new [[pharmaceutical drug]]s; and legal catalyst strategy, which specializes in companies involved in major lawsuits.

===Relative value===
{{Main|Relative value (economics)}}
Relative value arbitrage strategies take advantage of relative discrepancies in price between securities. The price discrepancy can occur due to mispricing of securities compared to related securities, the [[Underlying|underlying security]] or the market overall. Hedge fund managers can use various types of analysis to identify price discrepancies in securities, including mathematical, [[Technical analysis|technical]], or [[Fundamental analysis|fundamental]] techniques.<ref>{{cite web |url=http://www.barclayhedge.com/research/definitions/Relative-Value-Arbitrage-definition.html |title=Relative Value Arbitrage definition |publisher=BarclayHedge Ltd. |access-date=20 March 2011 |archive-url=https://web.archive.org/web/20110225193036/http://www.barclayhedge.com/research/definitions/Relative-Value-Arbitrage-definition.html |archive-date=25 February 2011 |url-status=live |df=dmy-all }}</ref> Relative value is often used as a synonym for [[market neutral]], as strategies in this category typically have very little or no directional market exposure to the market as a whole.<ref>{{cite book |title=Absolute Returns: the risks and opportunities of hedge fund investing |first=Alexander |last=Ineichen |year=2002 |publisher=John Wiley & Sons |isbn=978-0-471-25120-0 |page=[https://archive.org/details/absolutereturnsr0000inei/page/181 181] |url=https://archive.org/details/absolutereturnsr0000inei/page/181 }}</ref> Other relative value sub-strategies include:

*[[Fixed income arbitrage]]: exploit pricing inefficiencies between related fixed income securities.
*[[Equity market neutral]]: exploit differences in stock prices by being [[Long (finance)|long]] and [[Short (finance)|short]] in stocks within the same sector, industry, market capitalization, country, which also creates a hedge against broader market factors.
*[[Convertible arbitrage]]: exploit pricing inefficiencies between [[Convertible security|convertible securities]] and the corresponding [[stock]]s.
*Asset-backed securities (fixed-income asset-backed): [[fixed income arbitrage]] strategy using [[Asset-backed security|asset-backed securities]].
*Credit long/short: the same as long/short equity, but in [[credit market]]s instead of equity markets.
*[[Statistical arbitrage]]: identifying pricing inefficiencies between securities through mathematical modelling techniques
*[[Volatility arbitrage]]: exploit the change in [[volatility (finance)|volatility]], instead of the change in price.
*Yield alternatives: non-[[fixed income arbitrage]] strategies based on the yield, instead of the price.
*Regulatory arbitrage: exploit regulatory differences between two or more markets.
* [[Risk arbitrage]]: exploit market discrepancies between acquisition price and stock price.
*[[Value investing]]: buying securities that appear underpriced by some form of fundamental analysis.

===Miscellaneous===
In addition to those strategies within the four main categories, there are several strategies that do not entirely fit into these categories.

*[[Fund of hedge funds]] (multi-manager): a hedge fund with a diversified portfolio of numerous underlying single-manager hedge funds.
*Multi-manager: a hedge fund wherein the investment is spread along separate sub-managers investing in their own strategy.
*Multi-strategy: a hedge fund using a combination of different strategies.
*[[130-30 funds]]: equity funds with 130% long and 30% short positions, leaving a net long position of 100%.
*[[Risk parity]]: equalizing risk by allocating funds to a wide range of categories while maximizing gains through financial leveraging.
*AI-driven: using sophisticated [[machine learning]] models and sometimes [[big data]].