Hedge Fund Strategies

Hedge fund strategies are the distinct investment approaches used by hedge funds. Each strategy has different return drivers, risk exposures, and correlations to public markets. Strategy selection determines whether a hedge fund allocation reduces portfolio volatility, adds uncorrelated return, or simply replicates liquid market beta at higher cost.

Allocator Relevance: Strategy-level due diligence matters more than manager-level for hedge funds. A long/short equity fund in a risk-on environment behaves very differently from a market-neutral or macro fund. LPs must model correlation and drawdown at the strategy level, not just the manager level.

Market Context

As of Q3 2025, the SEC reports 9,940 hedge funds with $13.9 trillion in NAV, spanning five primary strategy categories. In 2024, hedge fund managers filed 6,130 Form D exempt offering notices — the highest of any private fund type — reflecting active fund formation across all strategies. Source: SEC Form PF Q3 2025 and EDGAR Form D, aggregated by Altss.

Major Strategy Categories

• Long/short equity — the oldest strategy; long undervalued stocks, short overvalued ones; net exposure typically 30–70% long
• Global macro — directional bets on currencies, rates, and commodities based on macroeconomic analysis; George Soros's 1992 sterling trade is the archetype
• Event-driven — merger arbitrage, special situations, distressed securities; return driven by corporate events rather than market direction
• Quantitative / systematic — algorithm-driven strategies; signals from price momentum, mean-reversion, factor models; execution at high frequency or low
• Multi-strategy — capital allocated dynamically across multiple strategies within a single fund; reduces single-strategy concentration
• Credit / fixed-income relative value — arbitrages between related credit instruments; exploits mispricings in bond, loan, and CDS markets

Strategy Correlation Profiles

Long/short equity funds typically carry 0.5–0.7 correlation to public equity — useful for dampening volatility, not for true diversification. Global macro and managed futures (CTA) funds have historically shown near-zero or negative equity correlation, making them the best true portfolio hedge. Event-driven funds correlate with credit spreads and deal completion rates rather than market direction.

Fee Structures by Strategy

Fee terms vary by strategy complexity and demand. Traditional long/short equity has compressed to 1.5% management / 15–17.5% performance. Quantitative and multi-strategy funds command 2–3% management / 20–30% performance due to infrastructure cost and capacity constraints. Global macro managers with strong track records still negotiate 2-and-20 with high-water marks.

Common Misconceptions

• All hedge funds are not the same — long/short equity and global macro have nearly opposite return profiles in risk-off environments
• Quantitative strategies do not eliminate human judgment — model design, data selection, and risk limits reflect significant discretionary decisions
• Merger arbitrage does not guarantee returns — deal breaks can produce -20% or worse outcomes on single positions

Key Takeaways

• 9,940 hedge funds / $13.9T NAV across five primary strategies as of Q3 2025; 6,130 new Form D filings in 2024 (SEC Form PF, aggregated by Altss)
• Correlation to public equity varies from near-zero (macro/CTA) to 0.5–0.7 (long/short equity) — strategy determines diversification benefit
• LP due diligence must assess strategy-level risk independently of manager track record