Hedge Fund Articles


What are some Emerging Investment Strategies for Hedge Funds?

Risk Arbitrage

Risk arbitrage hedge fund strategies usually involve purchasing stocks of companies that are likely takeover targets, while assuming short positions in the would-be acquiring companies. Risk arbitrage hedge fund managers can employ an event-driven investment strategy or merger arbitrage investment strategy, seeking situations such as hostile takeovers, mergers and leveraged buyouts. Such funds typically experience moderate amounts of volatility. Technically arbitrage is riskless but this is not realistic, the amount of risk taken on within each arbitrage situation is decided by the portfolio management team and traders.

130/30

130/30 hedge funds are one of the fast growing strategies within the hedge fund industry. 130/30 hedge funds are like normal 100% long managers except they are allowed to short 30% of the value of the portfolio and then use those shorting proceeds to go an additional 30% long in the portfolio. The end results is a overall portfolio position of 130% long and 30% short.

Green Investing

Green and socially responsible investing has been growing steady and many predict the total market for green and socially responsible mandates just on the institutional level will be 3-4x where it is at right now. Many green hedge funds have been seeing strong returns and it is an area that is not yet over-crowded or dominated by large players. New York used to be the sole center for green hedge fund management but Europe, specifcally London is now gaining ground in this area of the industry.

Green hedge funds can range in strategies from screen for equities that only invest in “green businesses” to carbon trading, renewable energy credit trading, ethanol trading and emissions trading. Similar to many other hedge fund strategies green hedge funds are playing risk arbitrage and variations of long-term value and short term momentum growth plays to earn returns for their investors.

Litigation Funding

This is where a hedge fund dedicates a portfolio or section of a portfolio towards funding litigation that the manager believe highly favors the party they are supporting. With third party litigation funding, the investors cover a portion or all of the costs of litigation in exchange for a share of awards by the court. Funds employing this strategy retain legal experts and refer to niche experts on each case before weighing in on the change of possible victory.

Multi-Strategy Hedge Funds

Multi strategy hedge funds use several strategies within the same pool of assets. They might seek returns from running money focused on shorting equities, investing in global real estate projects, and seeking momentum focused event driven strategies. The diversification benefits help to smooth returns, reduce volatility and decrease asset-class and single-strategy risks. These funds may allocate funds to a certain strategy in response to market trends allowing them to more easily capitalize on favorable market conditions. Due to the unpredictable nature of this type of fund, the volatility varies. A downside to this form of investing is that they will rarely be the highest performing fund over a short time period. This is because the diversification dilutes the returns of any highly profitable strategy. The long term consistency, however, generally outweighs this risk.

Richard Wilson is a hedge fund consultant, founder of the Hedge Fund Group (HFG) and runs the Hedge Fund Consultants Blog.

About Richard C. Wilson

Richard Wilson is a hedge fund consultant, founder of the Hedge Fund Group (HFG) and runs the Hedge Fund Consultant Blog.
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