Hedge Funds Are Funds That Can Include Essay

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Hedge funds are funds that can include short and long positions, trade options or bonds, purchase and sell undervalued securities, and use arbitrage and invest in nearly every opportunity in any market with predictable impressive gains at minimized risks. The basic and main objective of many hedge funds is to lessen volatility and risk while trying to maintain capital and provide positive returns within all market conditions. Hedge fund strategies differ hugely because of the current volatility and expectation of corrections in the overheated stock markets. Notably, there are around 14 different investment strategies that are used by hedge funds with each of them providing varying degrees of return and risk. As a result, understanding the differences between these hedge fund strategies is critical because they provide different investment returns ("What is a Hedge Fund?" n.d.). Nonetheless, certain strategies that are not connected to equity markets are able to provide constant returns with extremely low risk of loss whereas others are increasingly volatile than mutual funds. On the contrary, most of these strategies benefit from being non-connected to the direction of equity markets.

Similarities in Hedge Fund Strategies:

Hedge fund strategies are categorized in various strategy classes such as event drive, equity base, tactical, and relative value. The equity base hedge is generally known as long/short equity and it's considered as the simplest strategy to understand though it has several sub-strategies (Barufaldi, n.d.). Event-driven strategies are hedge funds in which liquidations don't have an ordinary buyer base with returns anticipated to be low (Mirandon, n.d.). These funds seek to generate profitable timely investments in securities that are currently impacted by certain events. The tactical strategies for hedge funds are those that speculate on the market's direction on prices of commodities, currencies, equities and/or bonds (Chriss, 1998). Relative value strategy basically entails the attractiveness evaluated on the basis of liquidity, risk, and return relative to each other.

The sub-strategies in each of these various categories of hedge funds contain several similarities.

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First, the long/short, short selling, and market neutral strategies fall under the equity base hedge strategy because they use the same basic concepts applicable to a hedge fund manager. In this case, these funds managers have the ability to buy stocks that are regarded as undervalued or sell those that seem to be overvalued (Harper, 2009). These sub-strategies also attempt to separate the individual risk of stocks from the existing market risk.

Secondly, merger/risk arbitrage and distressed strategies are under the event driven class strategy because they seek for events with the probability to have an impact within a relatively short period of time. Both of these sub-strategies achieve this by focusing on securities of companies due to the inefficiency and illiquidity of securities. Similar to the distressed strategies, merger/risk arbitrage strategy accumulates large shareholdings to impact merger negotiations and results (Connor & Lasarte, n.d.). Third, the relative value arbitrage and convertible arbitrage are relative value strategies that acts a catchall for a series of various strategies used with a wide array of securities. The basic concept in these strategies is that the hedge fund manager buys a security which is expected to appreciate while selling short securities that are anticipated to depreciate. The main similarity between relative value arbitrage and long/short strategy is that they both involve the buying and selling of at least two related securities.

Differences in Hedge Fund Strategies:

The main reason for the existence of a variety of hedge funds is attributed to the significant differences that exist between them. Long/short and short selling hedge funds are strategies that are suitable for equity markets that will have positive exposure whereas market neutral strategies are geared towards lessening the exposure to the entire market. As a result, there are two main strategies used to achieve market neutrality including ensuring that investments in long and short positions are….....

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