Hedge Fund Strategies

No single standard classification

Index providers, databases and industry bodies each publish their own strategy taxonomy, and the boundaries differ: one provider's relative value bucket can hold what another files under credit or event-driven. The families below recur across many of these schemes under varying names. When comparing data, use one provider's taxonomy consistently and read its definitions.

The main families

Equity long/short. Long and short positions in equities; returns from stock selection plus net market exposure. Risks: market beta, crowding, short squeezes.

Event-driven. Positions around corporate events: merger arbitrage, special situations, activism, distressed securities. Risks: deal breaks, legal outcomes, illiquidity in distressed positions.

Relative value. Exploiting price differences between related instruments: fixed income arbitrage, convertible arbitrage, statistical arbitrage, volatility trading. Risks: leverage, funding and liquidity shocks, model risk.

Global macro. Directional or relative positions in rates, currencies, equity indices and commodities based on macroeconomic views. Risks: policy surprises, concentration in a few themes.

Managed futures. Run by commodity trading advisors (CTAs). Mostly systematic, often trend-following, trading in futures and forwards. Risks: trend reversals and choppy markets.

Credit. Long/short corporate and structured credit, capital structure arbitrage. Risks: defaults, liquidity, spread widening.

Multi-strategy. Several strategies in one fund, often run as a platform of independent portfolio-manager teams with central risk limits.

Liquidity follows strategy

Liquid strategies (macro, managed futures, much equity long/short) typically offer monthly or quarterly redemptions with short notice. Strategies with less liquid holdings (distressed, some credit, activism) use longer lock-ups, gates and side pockets. Investors match redemption terms to the liquidity of what the fund holds.

Fee models by strategy

Hedge funds commonly charge a management fee and a performance fee subject to a high-water mark. Many large multi-manager platforms instead pass through expenses, including portfolio-manager compensation, so their total cost is not captured by a headline management fee; investors compare them on all-in cost relative to net returns. Fee levels vary by manager, fund size and share class.

Strategy drift and classification risk

A manager's actual exposures can move away from its stated strategy (style drift), for example an equity long/short fund running persistently high net long exposure. Allocators check strategy classification against holdings and factor exposures rather than relying on the manager's label.

Not the same as

• Hedge Fund: Hedge fund is the vehicle and its terms; hedge fund strategies are what the vehicle does with the capital.
• Alternative Investments (Alternative Assets): Alternative assets is the broad category; hedge fund strategies are one branch of it.

Common mistakes

• Treating a strategy label as a precise classification across data providers.
• Assuming every hedge fund strategy hedges market risk; many run substantial directional exposure.
• Quoting typical fee or exposure levels as norms; they vary widely.

• Hedge Fund
• Style Drift
• Side Pocket
• Lock-Up Period
• Redemption Gate
• Distressed Debt