Investors leverage hedge funds to manage the risks posed by stock market investments. Independent hedge fund research is necessary since most hedge investments operate secretively. After all, they cannot advertise their services by sharing fund performance statistics publicly due to regulations. This post will discuss several types of hedge funds and investment strategies.
What is a Hedge Fund?
A hedge fund means private investors have constituted a limited partnership to combine their capital resources. A professional fund manager develops the investors’ portfolios to realize a higher return on investment (ROI).
The fund managers handling the hedge funds might benefit from investment research outsourcing because such services enable them to pursue particular data-driven strategies and their types. After all, intelligence in the public domain needs to be more comprehensive to describe market trends.
In-depth research on macroeconomic factors and industrial policies is also critical to the success of a hedge fund. Besides, some databases offering exclusive access to accredited investors maintain the tables of hedge fund indices, assisting the managers in performance monitoring and risk management.
Important Terminology:
- Longs or “long positions” imply that investors or fund managers believe that securities will appreciate in the long term. They invest in such financial securities for a considerable duration.
- Shorts, or “short positions,” indicate that investors will borrow a security and sell it with an expected drop in price. They will later repurchase this security at a lower price. Doing so has a distinctively high risk-reward ratio, and only veteran investment managers must use short selling.
What Types of Hedge Funds Are There?
1| Global Macro Funds
Investors use hedge fund research to analyze how political shifts affect financial stability in a region. Different political parties have unique priorities. Therefore, they make policy changes to reflect the value system that they promise to the voters, industrial lobbyists, and various international organizations.
Global macro hedge funds recognize the significance of elections, border disputes, terrorism, war-like situations, public unrest, and other social-economic disruptions. They help hedge investors and fund managers increase their financial resilience against these macroeconomic dynamics in a nation or a continent.
However, many types of global macro hedge funds aim to increase their returns by strategically allocating their resources to beat global market volatility. Investment research outsourcing firms offer volatility predictions that can help managers optimize the fund’s exposure to risk.
2| Directional Hedge Funds
The directional hedge fund managers evaluate whether market trends will remain stable or undergo a complete reversal. So, these funds correlate with market trends. Later, they optimize their investment strategies for short and long positions to maximize returns across different asset classes.
Directional hedge funds emphasize realizing a higher ROI. They also fluctuate on a year-on-year (YoY) basis in the short term. Still, their returns are high in investment strategies spanning decades. Aggressive investors with high-risk exposure prefer directional funds that outperform the market indices.
3| Non-Directional or Absolute Return Hedge
The fund managers who serve investors by prioritizing steady growth develop absolute return hedge funds. These non-directional investment instruments focus on less volatile assets. Therefore, the hedge fund research will identify stable portfolio development techniques.
Market risk neutralization is a differentiating feature of non-directional hedge funds., i.e., there is practically no correlation between these funds and market trends.
Conservative investors choose absolute return hedges because they believe risk reduction is more important. The ROI stays almost constant, and the fund manager’s skills significantly impact investor returns.
3| Event-Driven Funds
Certain events inspired by regulatory compliance requirements or business model modifications change how hedge fund research tools look at an organization. The following events tracked by investment research outsourcing firms affect the financial dynamics of a company.
- Bankruptcy implies an inability to settle loans. It initializes legal mechanisms to analyze the valuation of borrowers’ assets and repay the debt.
- Consolidation allows corporations to reconceptualize their subsidiaries, partnerships, business units, and secondary brands to increase consistency across branding and other operations.
- Recapitalization focuses on balancing a business’s equity and debt through financial restructuring.
- Liquidation means an enterprise makes its assets available for sale. 100% liquidation results from a company’s willingness to exit the market, stop all operations, and remove the registration.
- Acquisitions involve a larger corporation absorbing a smaller business via ownership restructuring. These events can enable companies to increase capacity, expand their business into other territories, or diversify their products and services for newer market opportunities.
Event-driven hedge fund managers use composite strategies to respond to such events. So, they evaluate whether they should increase or decrease their investments in a company.
4| Relative Values or Arbitrage
The prices of different securities have discrepancies that can either converge or diverge. Professional outsourcing firms help arbitrage fund managers via investment research reports that calculate the probability that price variations might shrink or widen.
Volatility arbitrage and equity market neutral arbitrage are two examples of relative value hedge funds. They use a “pairs trading” strategy to analyze multiple securities that differ in price. Later, they buy and sell them for a profit with minimal risk.
The speculations associated with undervalued or overvalued corporations assist hedge fund managers in optimizing their long and short positions. Macroeconomic variables and long-term historical averages are the guiding factors for efficient portfolio development.
5| Activist Funds
An activist hedge fund is suitable for fund managers and institutional investors who conduct independent research. Their participation in how the portfolio firms can function is more significant than the other types of hedge funds.
Securities and exchange commission (SEC) filings require higher transparency when activist hedge funds are involved. The associated intelligence helps you take strategic actions like liquidation, board management, and share buybacks. These activities depend on whether fund managers want to go long or sell short.
What Are the Hedge Fund Strategies?
1| Market Neutral Hedge Strategy
Market-neutral fund managers generate revenue through the skillful selection of stocks. After all, market risk exposure is virtually nonexistent because there is an adequate emphasis on both longs and shorts. However, a market neutral hedge strategy is suitable for conservative investors wanting stable returns. After all, rewards directly correlate with how much risk investors take with their capital resources.
2| Credit
Credit hedge strategies revolve around how the fund manager research and trade securities that exhibit comparable credit quality depending on the financial efficiency of different corporate issuers. Consider the following two components of credit hedge strategies.
- A mortgage-backed security (MBS) is a bond linked to multiple home loans and other categories of real estate debt. Therefore, banks that issue real estate loans become a middle party between homebuyers and investment firms.
- Collateralized loan obligations (CLOs) are securities backed by many loans. These loans might belong to private corporations and leveraged buyouts. CLO facilitates debt-backed securitization across other industries instead of focusing on real estate alone.
3| Fixed-Income Arbitrage
Hedge funds can engage investment research firms when outsourcing government bond analytics. Doing so enables them to improve bond selection and eliminate credit risks. Still, they benefit from price discrepancies between bonds and other interest-rates financial products.
Additionally, managers utilize arbitrage to purchase assets and securities on one market, sell them on another, and leverage the pricing differences strategically. Fund managers’ mistakes can exponentially increase the risk of losses in a fixed-income arbitrage strategy.
4| Long-Short Equity Hedge Strategy
Long-short equity strategists bet on winners and losers to minimize market risks. Hedge fund managers use investment research outsourcing to predict how two or more rival companies will perform in the market. Later, they take short positions to offset the long position’s market exposure risks.
5| Quantitative Strategy
The quantitative approach in hedge funds collects data from multiple sources for multivariate statistical modeling. It allows hedge fund research services to offer managers data-driven investment insights.
You can leverage extensive databases depicting thousands of performance variables for portfolio management. Several organizations offer premium access to hedge fund indices and historical trend charts.
Moreover, machine learning (ML) models optimized for the hedge fund research industry are popular among fund managers. Such features recommend potentially beneficial investment strategies using automated market data mining.
6| Short-Only Strategy
Some outsourcing firms and hedge fund managers put a remarkable effort into identifying overvalued stocks using holistic investment research strategies. They will compile intelligence on every financial performance report, press release, online survey, and supply vendor to evaluate all business risks. Short-only hedge fund strategies rely on the manager’s skill to beat the upward bias in equity capital markets.
7| Industry Focus
Fund managers create hedge funds for industries like energy, technology, and materials. Their expertise often results from industry knowledge. Familiarity with the business models in each target sector is also essential to this strategy. Managers also study the regional and global laws affecting the business’s international supply chain and investor relations (IR).
Conclusion
The different hedge fund strategies have served many investors with unique risk profiles. Market-neutral strategies associated with non-directional hedge funds can help you earn absolute returns if you prioritize a conservative portfolio management style.
However, equity hedges and short-only funds generate higher rewards due to increased risk exposure. Meanwhile, quantitative strategies provide more reliable risk assessments due to the continuous innovation in the financial technology (FinTech) industry.
Activist funds encourage fund managers and investors to make remarkable contributions toward company policies. Yet, you want demographic intelligence and financial stability insights to use global macro hedge funds and realize your goals.
A leader in investment research outsourcing, SG Analytics assists institutional investors and fund managers in acquiring a high-quality performance preview before they invest in a company. Contact us today for customized analytical support to beat the market’s historical ROI.
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