What Is A Hedge Fund Part 2

 

Yesterday, I wrote about the main definition of a Hedge Fund. Today, we will go a little bit deeper into different types of Hedge Funds.

So here a few types of hedge funds models that are used:

-Market neutral: Basically these funds will generally have about the same proportion of stocks long or short. They will generally not have an exposure to the market in general and will instead have “bets”. Let’s say they have Walmart against Target. They do not really care if one does well or not, or how the economy performs. The most important aspect is to have Walmart outperform Target. It’s certainly a risky strategy but you only need to win a certain majority of these “bets” to come out on top. Not much cash is required for such funds relative to their positions since they are shorting as well (something to be discussed in a future column).

-Global macro: Global Macro funds are generally trying to gather an image of the global economy. They will also be placing relative bets, but generally not on specific companies. Rather, they will invest according to specific scenarios, for example what would happen in a economic slowdown such as we are currently seeing. We could expect Gold to outperform the US dollar for example so it would be possible to take that position. Then we could say that the Canadian economy will suffer more than the French economy for example from a US slowdown (not seeing this so far though!!!!) and go short TSX (Toronto stock exchange) vs CAC40 (index for French markets). There are many many examples. The toughest in such a strategy is to maintain the positions when the market is not going in your direction as bubbles can go on for a while and you will be losing money until the market reverses in your direction (just think of someone who shorted crude oil a few months ago).

-Event driven: Basically these funds will bet on specific market events. For example, they could have bought shares of Yahoo! expecting or hoping that someone (such as Microsoft) would make an offer and that the Yahoo! shares would go up. In such funds, having inside information is key.

Over the past few years, Hedge funds have been transformed significantly as many new funds have entered the markets and very important sums of money have flown towards these non traditional funds. It will be an interesting ride for these funds as they continue to seek high returns as well as escape laws that currently apply to traditional funds.

So that’s it for now, I hope to get a chance to return to TFB soon!

 

 

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• What Is A Hedge Fund Part 1
• Hedge funds… an absolute return vehicle?
• A Deeper Look Into The World Of Hedge Funds; An Interview About the CHA Designation
• 8 Reasons Why You Should Sell a Mutual Fund
• Real Return Bonds and Gold: How to Hedge Yourself against Inflation

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