Hedge funds are one of the riskiest investment instruments; this is probably the reason it is suitable only for the affluent. This kind of investment helps protect against the risks of the portion of assets invested in a separate sector. Scott Tominaga explores how hedge funds operate to generate high returns for all its investors who are mostly accredited, investors.
The different types of hedge funds
There are a few different types of hedge funds that one could select as an investment instruments.
- Global macro hedge fund
- relative value hedge fund
- activist hedge fund
- equity hedge fund
- funds of funds
Strategies of hedge funds
The investment style of a fund’s manager classifies the strategies of hedge funds. They are directed towards covering risk tolerance and philosophies of investments. There are varied strategies to handle hedge funds that include equity, event-driven goals, and fixed income. This is why it is crucial to understand the kind of risk involved in each strategy type to discern whether or not it is suited to one’s purpose.
- Long-short strategies – this is by far the most common strategy used by investors in which the investment is made by taking short positions on those that have a probability of losing. Simultaneously, it is advised experts such as Scott Tominaga, take long positions on those that have the potential of winning. In this way, the market risks are considerably mitigated. This uses public equity and hence the liquidating procedures, i.e. either withdrawal or addition are done comparatively easily.
- Market neutral strategies – the short positioning in this is done more effectively making the net-market exposure zero. While the risks are lower in this the returns are also low in comparison to other more aggressive strategies. The returns are generated by the manager entirely from a selection of stock.
- Arbitrage strategies– in this the difference in the global prices, are taken advantage of with the help of data and signaling. This again is of four types – merger arbitrage, convertible arbitrage, capital structure arbitrage, and fixed income arbitrage.
- Event-driven strategies – the temporary mispricing that may occur due to some corporate event such as mergers, acquisitions, or tender offers is a good time to invest according to the event-driven strategy. However, one needs specialized knowledge in carrying this strategy out successfully, emphasizes Scott Tominaga.
- Global Macro strategy – under this strategy one should take advantage of the major economic or political changes that occur across the globe. The economic variables are analyzed by the managers to understand the changes that may occur in the interest rates. Post that the investment is planned.
- Short-only strategy – this is the selling of the shares that are expected to fall in value.
Investing in a hedge not only includes a big capital but also the ability to sustain a loss, if any is encountered. Hence, this is one investment tool that is not suited for everyone. Therefore, those who seek to invest in these should have a thorough understanding of all the risks that these are subject to in the market.