Lesson 2 of 9 · All lessons in this module
- What makes a hedge fund different
- Strategy families and equity hedge strategiesVideo lesson
- Event-driven strategies
- Relative value and opportunistic strategies
- Investing directly: partnerships, master-feeders, side letters and SMAsVideo lesson
- Investing indirectly: funds of funds and replication ETFs
- Where hedge fund returns come from, and why indexes flatter them
- Risk, return and diversification in a portfolio
- Integrated case: classify, size and cost a multi-strategy book
Lesson 2 of 9 · 14 min
Strategy families and equity hedge strategies
Hedge funds are grouped into five strategy families, and the oldest, equity hedge, buys shares it thinks are cheap and shorts those it thinks are dear, with the net market exposure ranging from long biased to zero to net short.
In short
- Five families: equity hedge, event driven, relative value, opportunistic and multi-manager. Classification helps pick strategies, build portfolios and choose benchmarks.
- Strategies are classified by the instruments used, the trading philosophy and the risks taken.
- Most equity hedge funds work bottom-up (company, then industry, then market); top-down starts with the macro view.
- Fundamental long/short, growth and value funds usually end up long biased, so their beta is above zero.
- Short-biased funds are mainly short overvalued shares; useful in stress, but they have struggled over long rising markets.
- Market-neutral funds aim for a beta near zero and usually need leverage to reach meaningful returns.
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