Hedge funds are among the most popular investment vehicles available today. By smartly investing in hedge funds, any investor would get to enjoy great returns with minimal risk involvement. As per Scott Tominaga this investment vehicle is majorly characterized by its unusual trading strategies and the capacity to fetch high returns. Hedge funds have quite a low correlation to diverse traditional investment products, and can help people to grow their money in a relatively short period of time.
There are many reasons that encourage people to invest in hedge funds. While for one investor it might represent a chance to trounce the market, others may aim at diversifying their portfolio beyond bonds and stocks. According to Scott Tominaga , investors typically employ a variety of “alternative” strategies to grow their money through this investment vehicle. These strategies may range from short-selling stocks, to actively influencing change by acquiring important positions in major companies.
Most hedge fund strategies are designed to fetch positive returns in both rising and falling equity and bond markets. Hence, the risk involvement in this investment vehicle is comparatively low. Scott Tominaga mentions that people must select the perfect hedge fund investment strategy as per their financial goals.
Here are a few of the most prominent hedge fund strategies:
- Long/Short Equity: In such strategies, profit opportunities are effectively exploited in both potential downside and upside price moves. Long/short equity strategies take long positions in stocks that are relatively underpriced, while also selling short stocks that are considered to be overpriced.
- Equity Market Neutral: In this investment strategy, the differences in stock prices would be exploited in certain stocks that are closely related by being short and long in equal amount. Such stocks might be within the same industry or may just share similar features, like market capitalization.
- Merger Arbitrage: This hedge fund strategy involves the process of purchasing and selling the stocks of two merging firms companies, to acquire profits without any risk involvement. A merger arbitrageur typically reviews the probability and outcomes of a merger thoroughly before making any decision. They especially focus on the chances of the merger not closing on time, or even at all.
- Global Macro: Such strategies are largely based on the holdings that depend on the overall political and economic views of diverse countries, as well as their distinguished macroeconomic principles. The holdings in global macro strategies might include long and short positions in commodities, currencies, future markets and equities.
- Volatility Arbitrage: Through such a strategy, the investors aim at profiting from the differences between the forecasted future price-volatility of an asset and options based on its implied volatility. These assets can include both stocks and bond. Volatility arbitrage strategies employ various derivative contracts to acquire the most profitable outcomes.
As per Scott Tominaga, market direction neutrality is a common theme among most of the hedge funds strategies. They are focused on making money regardless of the market trends.