The Different Types Of Hedge Funds

By Author: Fabiola Groshan
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Although in the past people have been reluctant to invest in hedge funds, deeming them as a financial product catering only to the wealthy, today hedging has become quite popular, mainly due to the flexibility of the investment and to the hedging strategies that decrease the level of risk . Many, but not all, hedge fund strategies tend to hedge against downturns in the markets that are being traded. Hedge funds are flexible in their investment options, in the sense that they can use short selling, leverage and derivatives such as puts, calls, options, futures and many more.

There are many different types of hedge funds today and most of them would include aggressive growth, which refers to investment into companies with a view that those companies will rise in value. Distressed securities is another type of hedge funds, which means trading of companies that are in debt or face bankruptcy. Some hedge funds managers seem to believe that, in these situations, there are pricing inefficiencies and more value within than realized. Richard Cayne Meyer International emphasizes on the emerging markets part of the hedge funds, ...
... which is about investing in equity or debt of emerging (less mature) markets, as they tend to have higher inflation and volatile growth. In some cases hedge funds can be mixed and matched with other pooled investment vehicles, which is called Fund of Funds. This blending of different strategies and asset classes aims to provide a more stable long-term investment return than any of the individual funds, according to Richard Cayne Meyer Asset Management Ltd.

Other types of hedge funds include Income funds, in which cases the investment is done with the primary focus on yield or current income, rather than focusing solely on capital gains. There is also the Macro fund that aims to profit from changes in global economies, typically brought about by shifts in government policy which impact interest rates, in turn affecting currency, stock and bond markets. In an attempt to explain the wide variety of hedge funds, Richard Cayne Meyer International talks about a concept called Market Neutral, which can refer to Arbitrage, attempting to hedge out most market risk by taking offsetting positions, often in different securities of the same issuer and often across different markets, or it can also refer to Securities Hedging, which means investing equally in long and short equity portfolios, generally in the same sectors of the market.

The opportunities brought about by hedge funding are wide and various and the list of hedge funds types can go on with Opportunistic, in which case investment theme changes from strategy to strategy, as opportunities arise to profit from events such as IPOs, sudden price changes often caused by an interim earnings disappointment, hostile bids and other event-driven opportunities or
Multi Strategy, where the investment approach is diversified by employing various strategies simultaneously to realize short- and long-term gains. To that list Richard Cayne of Meyer International adds Short Selling, referring to the sale of securities short in anticipation of being able to re-buy them at a future date, at a lower price, due to the manager’s assessment of the overvaluation of the securities, or the market, or in anticipation of earnings disappointments often due to accounting irregularities, new competition, change of management and so on. There also are Special Situations, when managers of the hedge funds invest in event-driven situations, such as mergers, hostile takeovers, reorganizations or leveraged buy outs. It may involve simultaneous purchase of stock in companies being acquired and the sale of stock in its acquirer, hoping to profit from the spread between the current market price and the ultimate purchase price of the company.

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