Trading strategies used by hedge funds

Trading strategies used by hedge funds

Posted: alexandruk Date: 27.06.2017

Hedge funds are not regulated in the same way that mutual funds, exchange trade funds ETFs and unit trusts are. While they do make periodic filings of holdings, hedge funds within the United States are also subject to regulatory, reporting and record-keeping requirements.

trading strategies used by hedge funds

Transparency is often avoided, as they do not want copycat trades or their strategies being used. One thing is for sure, hedge funds have been known to use every legal and some not so legal trick in the book to generate alpha and outsized returns for their investors.

The Seven Best Paying Jobs With Only High School Diploma. The larger the return, often the bigger the fees. Here are 10 of the top strategies used by hedge funds to generate returns for their clients. Leverage, or borrowed money, is more of a tactic than a strategy.

The use of leverage has been one of the best and worst tactics employed by hedge funds over the past 20 years. When done right, and used in a reasonable manner, strong trading or investment returns are increased by the extra money that is put to work. When done wrong, leverage can exacerbate a sell-off as the hedge fund receives margin calls and is forced to sell positions to meet them.

Some hedge funds have used leverage as high or higher than to one. That can be dangerous if the market turns against you, regardless of the asset class.

America's Most Popular Six-Figure Jobs. Short Only is a very difficult strategy in which the hedge fund only sells stock short.

Portfolio managers running short only portfolios have been absolutely crushed over the past couple of years as the rising market tide has lifted most boats. There have been solid fundamental shorts where the story had dramatically changed. BBRY was a perfect example.

Once the undisputed leader in cell phones for business, the smartphone revolution crushed the demand, and the company is now seeking a buyer. In many cases the trades are called a pair-trade.

Hedge Funds: Strategies

This is a trade where the fund matches stocks in the same sector. For instance they would be long a semiconductor stock like Intel Corp. INTC and short NVIDIA Corp. This gives the hedge fund sector exposure on both sides of the trade. Market Neutral is a strategy accomplished in two ways.

Most Common Strategies used in Hedge Fund Trading

If there are equal amounts of investment in both long and short positions, the net exposure of the fund would be zero. The perfect market for this strategy is a grinding, sideways, trading market. Huge moves up or down would tend to negate the other side. Relative Value Arbitrage is often a strategy used at hedge funds that trade debt. Ultimately the premium bond will mature at par as will the lower coupon bond. States Where Homebuyers Pay Cash.

Equity Arbitrage funds typically look for takeovers, especially ones that are done with stock or stock and cash. Recently Verizon Communications Inc. VZ announced it was buying the remaining share of Verizon Wireless from Vodafone Group PLC VOD.

Distressed Debt is a unique area that is a narrow and complex sector. This strategy involves purchasing bonds that have lost a considerable amount of their value because of the company's financial instability or investor expectations that the company is in dire straits.

Top 9 Hedge Fund Strategies of All Time | WallStreetMojo

In other cases, a company may be coming out of bankruptcy and a hedge fund would be buying the low-priced bonds if their evaluation deems that the company's situation will improve enough to make their bonds more valuable. The strategy can be very risky as many companies do not improve their situation, but at the same time, the securities are trading at such discounted values that the risk-adjusted returns can be very attractive.

Often the hedge funds will become involved with actually running the companies. Event-Driven funds strictly look for any item that can move the market up and down. Many have computer programs that constantly scan world headlines looking for even five seconds of lead time. A perfect example was on Friday.

trading strategies used by hedge funds

Despite a less than stellar jobs number, the market opened up. Within 15 minutes headlines were crossing that said Russian President Vladimir Putin would help the Syrian government if strikes were launched. Immediately the market dropped more than points on the headline. Often event-driven hedge funds are more big picture, like the ongoing Syrian situation and companies that may do business there or in the region.

Quantitative hedge fund managers often employ computer programmers who comb the statistical models and data looking to find alpha that hide behind market abnormalities. This can be exploited by super high-frequency trading programs that can buy and sell thousands of stocks or futures in an instant. Unfortunately, quant computer programs do not always anticipate market commentary. Some funds lost big back in the May to June bond market rout that was instigated by commentary by Federal Reserve Chairman Ben Bernanke.

Hedge fund investing, long the financial playground for the rich may become more obtainable for investors. Wall Street firms are putting hedge fund type product together that is being sold in mutual fund type packaging. Every properly allocated portfolio should, if possible, have some capital carved out for alternative investments like hedge funds.

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Hedge Fund Manager Lex van Dam reveals his trading process

Stocks to Watch Target hit with a downgrade, Sears sinks, FedEx up on beat. Ten Strategies Hedge Funds Use to Make Huge Returns, and You Can Too. The Seven Best Paying Jobs With Only High School Diploma The larger the return, often the bigger the fees.

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