Types of hedge funds: Emerging Markets, Multi Strategy, Distressed Securities, Macro, Fund of Funds
Invests in equity or debt of emerging (less mature) markets that tend to have higher inflation, volatile growth and the potential for significant future growth. Examples include Brazil, China, India, and Russia. Short selling is not permitted in many emerging markets, and, therefore, effective hedging is often not available. This strategy is defined purely by geography; the manager may invest in any asset class (e.g., equities, bonds, currencies) and may construct his portfolio on any basis (e.g. value, growth, arbitrage) Short Selling: In order to short sell, the manager borrows securities from a prime broker and immediately sells them on the market. The manager later repurchases these securities, ideally at a lower price than he sold them for, and returns them to the broker. In this way, the manager is able to profit from a fall in a security’s value. Short selling managers typically target overvalued stocks, characterized by prices they believe are too high given the fundamentals of the underlying companies. It is often used as a hedge to offset long-only portfolios and by those who feel the market is approaching a bearish cycle.
Aims to profit from changes in global economies, typically brought about by shifts in government policy that impact interest rates, in turn affecting currency, stock, and bond markets. Rather than considering how individual corporate securities may fare, the manager constructs his portfolio based on a top-down view of global economic trends, considering factors such as interest rates, economic policies, inflation, etc and seeks to profit from changes in the value of entire asset classes. For example, the manager may hold long positions in the U.S. dollar and Japanese equity indices while shorting the euro and U.S. treasury bills. Uses leverage and derivatives to accentuate the impact of market moves. The leveraged directional investments tend to make the largest impact on performance.
Funds of Hedge Funds:
The manager invests in other hedge funds (or managed accounts programs) rather than directly investing in securities such as stocks, bonds, etc. These underlying hedge funds may follow a variety of investment strategies or may all employ similar approaches. Because investor capital is diversified among a number of different hedge fund managers, funds of funds generally exhibit lower risk than do single-manager hedge funds. Funds of funds are also referred to as multi-manager funds. Itâ€™s a diversified portfolio of generally uncorrelated hedge funds and itâ€™s a preferred investment of choice for many pension funds, endowments, insurance companies, private banks and high-net-worth families and individuals
The manager typically utilizes many specific, pre-determined investment strategies, e.g., Value, Aggressive Growth, and Special Situations in order to better diversify their portfolio and/or to more fully use their range of portfolio management skills and philosophies and also in order to realize short or long term gains. This style of investing allows the manager to overweight or underweight different strategies to best capitalize on current investment opportunities. Although the relative weighting of the chosen strategies may vary over time, each strategy plays a significant role in portfolio construction.
The manager invests in the debt and/or equity of companies having financial difficulty. Such companies are generally in bankruptcy reorganization or are emerging from bankruptcy or appear likely to declare bankruptcy in the near future. Because of their distressed situations, the manager can buy such companies’ securities at deeply discounted prices. The manager stands to make money on such a position should the company successfully reorganize and return to profitability.