6 Hedge Funds Strategies

6 Hedge Funds Strategies

Share on facebook
Share on twitter
Share on linkedin

In a simple explanation, hedge funds are a pool of money invested through a fund manager by hedging risk to investors' capital against market volatility by engaging a lot of different assets and complex investment strategies. Investment strategies implemented can generate positive returns in both bull and bear markets.

Here are the six most-used hedge fund strategies to cater to various investment styles among investors while ensuring risk reduction and stable portfolio volatility. 


1. Direct Short and Long Strategies

A fund manager will analyse the market conditions, trends, and the company's future prospects (for stocks), which can be applied with long or short strategies. Managers will predict the directional move of the market as they analyse whether the market/equity price movement will continue or reverse in their prediction period. 

A long position is taken place where managers will go long on underpriced equities with the prediction that the price will go up, while a short position taken where managers will take a short position on overpriced equities. It is a method of taking advantage of the profit opportunities on both prices under-valued and over-valued conditions. 


2. Pair Trade Strategies

In 'Pair Trade' Strategies, managers will take long and/or short strategies on two securities with the same or totally contrasting characteristics. 


Suppose the manager's analysis shows that the expectation of Apple will perform better than Samsung. They can go long on Apple and go short on Samsung, or they can buy Apple stocks now, and when the event of price balance point takes place, the managers can later sell Apple stocks and buy Samsung stocks. For example, in the case of Stock Pair Trade. 


Other Pair Trade are like Commodity Pair like Gold vs Silver or Index Pair. Index Pair is when one currency pair is unavailable like USD and HKD are pegged and can't be traded. However, FTSE and Hang Seng can still be paired


3. Global Macro Trend Strategies

A global macro hedge strategy is where managers' predictions are based on global macroeconomics trends such as interest rate, inflation, employment rates, economic cycle, and even political events. This strategy allows profit gain from price shifts of market swings due to economic and political events. Unlike other techniques, global macro trend strategies focus on the systematic risks of the market. 

Currencies Trading uses this strategy the most as it requires traders to pay close attention to the financial situation of any country before making any decision—this strategy is based on the strength of one currency against one another.

Currencies trading open possibilities of enormous returns as they can be traded with margin. However, high leverage is extremely risky. 


4. Event-Driven Hedge Fund Strategies

Event-driven strategies take advantage of the underlying opportunity and risks associated with an event—examples of corporate events such as mergers and acquisitions, bankruptcy, consolidations, and liquidations. In a big corporation, even surrounding the top management team will also affect the company's stock prices. 

This strategy allows investors to exploit the company's stock price during the changes intermission period. 


5. Arbitrage Strategies 

Arbitrage strategies take advantage of the price differences between different securities by buying and selling investments within a brief period of time when prices foresee diverging or converging over time. 


Arbitrage strategies allow consistent returns with low risk. The three most used arbitrage strategies are pure arbitrage, merger arbitrage and convertible arbitrage. 


For example, if silver is sold at $25/ounce in one market and $38/ounce in another. Managers can generate $5/ounce by purchasing it at $25 and selling it at $38. The risk-free return of 12%, minus any transaction and miscellaneous expenses. 


6. Credit Funds Strategies

Credit Funds Strategies is where funds managers took advantage of credit where credit spreads narrow down during a booming economic growth period. By investing in credit funds, managers usually tend to take large investment positions using the ownership stake to control management. In the past, credit funds mainly focused on corporate credit but expanded into distressed debt holding and sovereign. 


Plus, the implementation of credit funds tends to focus on credit rather than interest rates where managers are short on treasury bonds to hedge their risk exposure. 

We hoped you’ve enjoyed this piece and appreciate the time you spent reading. We love making and sharing content which are insightful and actionable. Stay tuned for more exciting content, coverage and latest news about the world of finance. Visit to learn more about what we do and how can we help you in your investment journey.

Written by


Become a AXEHEDGE investor today.