Hedge fund strategies involve a set of risk tolerance instructions and principles within an array of investments, including debt and equity securities, currencies, derivatives, real estate, commodities and a host of other investment vehicles. Scott Tominaga mentions that the involvement in hedge fund investment strategies and its expansion has been quite incredible in recent years. These investment vehicles are largely designed to help an investor to acquire commendable returns in a limited period of time.
Hedge funds can be defined as private investment vehicles that are focused on generating positive absolute returns for institutional investors and high-net-worth individuals. Scott Tominaga mentions that these investment opportunities are usually seen as low risk, structured partnerships. The portfolio managers basically are a type of general partners of the funds with investment decision-making responsibilities. They aim at helping the investor to gain good returns at a limited span of time without much risk involvement.
Within the domain of edge funds, one can explore a variety of strategies that can be used for the purpose of gaining a greater return on the capital invested. These funds usually fall into one of the three categories, directional, relative value, and event-driven. An investor must analyze the risk involvement and opportunities for returns in all of them, before zeroing in on one strategy.
Here are some of the most popular hedge fund strategies Scott Tominaga prevalent today according to:
- Long/short equity: Arguably the most common fundamental equity strategies prevalent today, in a long/short portfolio an investor would have to stocks of companies that are expected to outperform while sell short stocks are expected to underperform. These portfolios have low correlations to the market, and hence can provide absolute returns regardless of the market performance.
- Market neutral: Market neutral funds are quite similar to the long-short funds as both of them seek returns that are independent of market performance. Such funds are designed to reduce or eliminate market volatility.
- Convertible arbitrage: A convertible debt basically refers to a bond that can be converted into stocks at some point in the future. Such a strategy is designed to isolate the interest coupon of a convertible debt by opting to hedge out the equity call option of the convertible debt. Convertible valuation, as well as option pricing is the two key elements to take into consideration when dealing with such strategies.
- Distressed investing: Distressed funds basically involve purchasing bank loans or high yield debt of companies that are dealing with a potential bankruptcy or restructuring. As the company is in distress and investors are also aware of the condition, their securities tend to be available at deep discounts.
In addition to the strategies underlined above, investing in emerging markets funds is also popular as they have quite an extensive mandate. Their investments can range from sovereign debt and currencies to even the equities of companies within emerging markets.